The 1% Move Report

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






Wealth Management — December 27, 2021

What Happened in the Markets?

  • US stocks traded higher on Monday as the S&P 500 rose 1.4% to close at 4,791. With the rally, the index is now up 27.6% year to date.  
  • The holiday cheer continues on Wall Street, with Monday's rally building upon a more than 2% surge for the S&P 500 in last week's holiday shortened trading. There was no clear catalyst for Monday's rally, though potentially favorable seasonality around the holiday season amid lower trading volumes likely contributed to the gains. As they did in last week's rally, technology and growth shares outperformed on Monday, while the yield curve flattened and oil prices reached their highest level in over a month. Markets will be open normally throughout this week with Friday's session marking the last trading day of the year. 
  • All 11 S&P 500 sectors traded higher on Monday, with Energy (+2.2%) and Information Technology (+2.2%) outperforming the broader market, while Consumer Discretionary (+0.8%) and Utilities (+0.5%) lagged. 
  • Rates were little changed across the curve, with the 10-year Treasury yield falling to 1.47% as of the 4 p.m. equity market close. Gold was flat on the day while WTI was higher at nearly $76 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 Monday as the S&P 500 rose 1.4% to trade to a new all-time high. With today's rally, the S&P 500 has now recorded 69 new all-time closing highs in 2021, the second most for a single calendar year in history, and has also had four consecutive days of gains. While concerns around rising COVID cases and the new Omicron variant, a hawkish pivot from the Federal Reserve and a more uncertain fiscal outlook weighed on equities earlier this month, in the past week markets have taken a decidedly more sanguine outlook on these risks, as the S&P 500 has now rallied more than 5% from last Monday's low to close at a new all-time high. As it relates to the virus, while case counts are surging at an exponential rate, causing event, school and office related shutdowns, hospitalizations continue to be progressing at lower levels than prior COVID variants; this pivotal point has appeared to partially catalyze the recent market reaction, as equities have been resilient in recent sessions. Thinner market liquidity around the holiday season could also potentially be adding fuel to the recent market rally, coupled with usually stronger seasonality at this time of year - to that end, the S&P 500's trading volume was down over 30% Monday versus the prior 30-day average. Monday's market leadership favored mega cap growth with technology stocks outperforming, continuing last week's strong performance, while WTI oil moved above $75 per barrel for the first time since the end of November. Looking ahead, outside of developments on Omicron, a number of housing economic data is set to release this week which will be watched by investors.

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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