The 1% Move Report

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






Wealth Management — December 22, 2021

What Happened in the Markets?

  • US stocks traded higher on Wednesday as the S&P 500 rose 1.0% to close at 4,697. With the rally, the index is now up 25.0% year to date.  
  • Equities have recorded two consecutive days of gains following Monday’s sell-off as the S&P 500 looks poised to recover from recent losses in this holiday-shortened week. While volatility has picked up in recent weeks as markets digest a surge in new COVID cases and the rise of the Omicron variant, a hawkish pivot from the Federal Reserve and uncertainty around the 2022 fiscal outlook following recent opposition to the President’s Build Back Better plan by a prominent moderate Democratic Senator, this week it would appear markets are taking a more sanguine view on all fronts as the S&P 500 has rallied to close Wednesday just ~0.5% below its mid-December all-time high. Looking forward, Thursday will mark the last day of trading this week with most major markets closed on Friday in observance of the Christmas Holiday.
  • All 11 S&P 500 sectors traded higher on Wednesday, with Consumer Discretionary (+1.7%) and Information Technology (+1.3%) outperforming the broader market, while Utilities (+0.4%) and Industrials (+0.3%) lagged. 
  • Rates were little changed across the curve, with the 10-year Treasury yield falling to 1.45% as of the 4 p.m. equity market close. Gold was higher on the day while WTI was also higher at nearly $73 per barrel. The US dollar was modestly weaker on the trading session, as measured by the US Dollar Index.

Catalysts for Market Move

Equity markets traded higher on Wednesday as the S&P 500 rose 1.0%. Equities have continued to rebound after Monday's losses, now recording gains in two straight sessions as the S&P 500 index currently trades less than 0.5% below the all-time high struck earlier this month. There has been no clear catalyst for this week's turnaround as markets continue to focus on surging COVID cases amid the new 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 negotiated in Washington, D.C. On the former, while new COVID cases continue to rise globally, markets appear to be taking a sanguine approach to the risks posed by Omicron with early data suggesting that while this new variant appears to be spreading much more quickly than earlier iterations of the virus, severity as measured by hospitalizations appears to be lagging. On the latter, more positive comments out of the White House on Tuesday that suggested a spending deal on the Build Back Better plan could still be reached early next year despite recent dissention among moderate Democrats may have helped ease market concerns that the prospects of more fiscal stimulus were dimming. Looking ahead, Thursday will mark the finish of trading this week with most major markets closed Friday in observance of the Christmas holiday.

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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