Wealth Management — December 17, 2021
- US stocks traded lower on Friday as the S&P 500 declined 1.0% to close at 4,621. With the sell-off, the index is now up 23.0% year to date.
- Equities traded lower on Friday as the S&P 500 has now declined in four of the past five trading sessions. There was no clear catalyst for the move lower into the weekend, though risks related to the Omicron variant appear to be continuing to weigh on markets, with New York setting a daily record for new cases on Friday. Outside of Omicron, the Federal Reserve has been in focus this week with Wednesday's meeting confirming the central bank's hawkish pivot as they accelerated the tapering of asset purchases; while markets staged a relief rally on Wednesday as the Fed announcement was largely in-line with market expectations, all of those gains were given back on Thursday and Friday. Cyclicals underperformed Friday after outperforming defensive and growth stocks on Thursday.
- All 11 S&P 500 sectors were lower on the session, with Real Estate (-0.3%) and Consumer Discretionary (-0.5%) outperforming the broader market, while Energy (-2.2%) and Financials (-2.3%) lagged.
- Rates were mixed across the curve, with the 10-year Treasury yield unchanged at 1.41% as of the 4 p.m. equity market close. Gold was flat on the day while WTI was lower at nearly $70 per barrel. The US dollar was modestly strong on the trading session, as measured by the US Dollar Index.
Equity markets traded lower on Friday as the S&P 500 declined 1.0%. With today's decline, the index finishes the week down 1.9%, following last week's 3.8% rally, which was the strongest weekly gain since February. This week was filled with market catalysts, as a slew of economic data was reported, the Federal Reserve held their last meeting of 2021, which confirmed their recent hawkish pivot, and COVID-19 cases continued to surge in the US and abroad. Regarding the FOMC meeting on Wednesday, the Fed largely met consensus expectations, as they committed to doubling the pace of asset purchase tapering from $15 billion to $30 billion a month, while the median Fed dot plot showed 3 rate hikes in 2022. With markets trading largely defensive into Wednesday's meeting, equities staged a relief rally after the FOMC statement and Fed Chair Powell's press conference; however, all of those gains were erased over the next two trading days with Thursday's and Friday's losses. While there was no clear catalyst for the sell-off, it appeared that risks in relation to the virus are mounting, as New York recorded the largest daily new case count on record of more than 20,000. Cyclicals bared the brunt of the move lower Friday, a reversal of Thursday's leadership when they were relative leaders, while the yield curve flattened as short-end rates moved higher and long-end rates move lower. Looking ahead, investors will be focused on the developments in relation to Omicron and the virus, as well as next week's consumer sentiment and housing data.
Record stimulus and a stronger-than-expected US reopening have accelerated the shift from early to mid-cycle, lifting equity markets to new all-time highs. The continued economic momentum in global trade, manufacturing, corporate earnings, and housing have set the tone for strong US economic growth; however, this backdrop has been increasingly priced into markets. Index-level valuations peaked at more than 22x forward earnings and history suggests valuation multiples will trend lower as earnings improve, supporting our base case year-end 2022 target of 4,400 for the S&P 500 and our bull case of 5,000. With higher expectations and a move into mid-cycle, investors should upgrade their portfolios by dialing back extreme positioning and allocating more exposure toward high-quality cyclicals and growth at a reasonable price. With a potential long-term infrastructure bill in progress and the unleashing of pent-up demand for services-related spending, the US faces a potential favorable outlook for economic growth and inflation possibly rebounding to a 2.5%-3% range over the coming years. However, optimal navigation of this new business cycle will require care as Treasury rates appear likely to move higher toward 2% in the next year, creating a headwind for long-duration assets. With regard to stocks, our preferences for quality and valuation support warrant allocating to international stocks with less expensive valuations, and cyclicals, including financials, which should benefit from the steeper yield curve. Dollar weakness is likely to continue as policy choices are debasing and relative growth outside the US becomes more compelling as the rolling global reopening continues. In fixed income, the challenge is two-fold: Generating sufficient income, while also preserving capital, requires a diversified and active exposure, with our preference toward a mix of high yield credit, preferreds, leveraged loans, asset-backed securities, including select mortgage-backed, and dividend-paying stocks. Real assets such as gold, infrastructure, and real estate present an attractive opportunity as a portfolio ballast for income generation and as an inflation hedge.
Market data provided by Bloomberg.
Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.
NASDAQ Composite Index: A broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market.
S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
US Trade-Weighted Dollar Index: A weighted average of the foreign exchange value of the 17US dollar against a subset of the broad index currencies that circulate widely outside the US.