Wealth Management — December 20, 2021
- US stocks traded lower on Monday as the S&P 500 declined 1.1% to close at 4,568. With the sell-off, the index is now up 21.6% year to date.
- Equities opened the holiday-shortened week lower on Monday as the S&P 500 has now declined in five of the past six trading sessions. The latest surge in COVID-19 cases appears to be weighing on equity markets, with the new variant Omicron causing school and office closings across much of the United States ahead of the holidays. A policy pivot from the Federal Reserve has also likely contributed to recent volatility, with last week's FOMC meeting confirming the Fed's recent hawkish pivot as the central bank commits to a faster taper and the median Fed dot now shows three rate hikes next year. Finally, news over the weekend that some moderate democrats don't support the President's Build Back Better spending plan may have weighed on sentiment as the prospects for further fiscal stimulus appear to be dimming.
- Nine of the 11 S&P 500 sectors were lower on the session, with Utilities (+0.1%) and Consumer Staples (+0.04%) outperforming the broader market, while Materials (-1.8%) and Financials (-1.9%) lagged.
- Rates were mixed across the curve, with the 10-year Treasury yield higher at 1.42% as of the 4 p.m. equity market close. Gold was lower on the day while WTI was sharply lower at nearly $68 per barrel. The US dollar was modestly strong on the trading session, as measured by the US Dollar Index.
Equity markets traded lower on Monday as the S&P 500 declined 1.1%. With today's decline, the index is now down in five of the past six trading sessions, and 3.0% in the past three days alone, marking the worst 3-day stretch since September. There are a number of catalysts to point to for the recent slide in equities, including 1) the surge in COVID-19 cases and what it could mean for the economy and markets going forward; 2) the tightening of monetary policy in 2022 and how this could affect future market liquidity; and 3) potentially stalling fiscal stimulus efforts as opposition for the Build Back Better bill has become more apparent. On the latter, over the weekend some senate moderates' opposition of the President's spending plan cast uncertainty as to whether the Build Back Better Act provisions will come to fruition. Regarding COVID-19 and the increase in cases of the new Omicron variant, various states across the US have now shut down office buildings and closed schools ahead of the holidays as the virus continues to spread. Markets have clearly reacted negatively to the recent surge and that was more evident on Monday, as over 80% of S&P 500 members declined and nine of the 11 S&P 500 sectors traded lower. Defensive sectors were relative outperformers as Utilities and Consumer Staples edged slightly higher. Oil prices also came under increased pressure on Monday as WTI oil traded back at $68 per barrel, while interest rates were lower at the front end of the curve but higher at the long end. Looking ahead, markets will continue to monitor developments in relation to Omicron this week as well as in economic data, with various consumer sentiment indexes scheduled to report. Both the bond and equity markets will be closed on Friday, December 24 in observance of the Christmas holiday.
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 US dollar against a subset of the broad index currencies that circulate widely outside the US.