The 1% Move Report

Timely commentary on market performance whenever the S&P 500 changes more than 1% in a day.






Wealth Management — December 21, 2021

What Happened in the Markets?

  • US stocks traded sharply higher on Tuesday as the S&P 500 rose 1.8% to close at 4,649. With the rally, the index is now up 23.8% year to date.  
  • Equities bounced back from Monday's sell-off, with the major averages reversing all of the prior session's losses to turn into positive territory for the week. There was no clear catalyst for the rebound, though positive commentary from the White House suggesting a deal on the Build Back Better plan could still be reached likely contributed to Tuesday's relief rally. Additionally, a large semiconductor company and a global retailer reported strong earnings results overnight, which could have also lifted sentiment on Tuesday. Interest rates were sharply higher across the curve while the Nasdaq 100 Index gained over 2% in the trading session. Expect markets to remain volatile in this holiday-shortened week, with markets closed on Friday in observance of the Christmas holiday. 
  • Nine of the 11 S&P 500 sectors were higher on the session, with Energy (+2.9%) and Information Technology (+2.6%) outperforming the broader market, while Consumer Staples (-0.1%) and Utilities (-0.2%) lagged.
  • Rates were higher across the curve, with the 10-year Treasury yield rising to 1.47% as of the 4 p.m. equity market close. Gold was lower on the day while WTI was sharply higher at over $71 per barrel. The US dollar was modestly stronger on the trading session, as measured by the US Dollar Index.

Catalysts for Market Move

Equity markets traded higher on Tuesday as the S&P 500 rose 1.8%. Equity markets rebounded following Monday's rout, paring all of the prior sessions losses and moving into positive territory for the week. Even with Tuesday's rally, the S&P 500 has still traded lower in five of the past seven sessions, but remains less than 1% off its all-time high last struck on December 10. There was no clear catalyst behind Tuesday's rebound, as markets continue to be focused on the continued spread of the Omicron variant, the Fed's recent hawkish pivot and what it could mean for future market liquidity, as well as updates on fiscal stimulus as the Build Back Better plan continues to be debated in Washington, D.C. On the latter, while headlines over the weekend suggested the President's spending plan may have lost support among some senate moderates, more positive commentary out of the White House on Monday suggested a deal could still be reached early next year and this may have contributed to Tuesday's move higher in rates and equities. On the earnings front, two notably strong reports from a large semiconductor company and a large apparel retailer overnight may also have helped buoy market sentiment, bringing focus back to strong fundamentals and away from the uncertainty posed by the Fed, Washington and the Omicron variant. Broad commodities surged in the session while interest rates moved higher across the curve; in equities, Energy and Technology stocks led the market higher, while defensives underperformed. Looking ahead, to end the holiday-shortened week developments on Omicron and fiscal negotiations as well as economic data such as personal income and consumer sentiment indexes will be watched closely.

The Global Investment Committee’s Outlook

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.


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