The 1% Move Report

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






Wealth Management — December 6, 2021

What Happened in the Markets?

  • US stocks rallied on Monday as the S&P 500 gained 1.2% to close at 4,592. With the rally, the index is now up 22.2% year to date. 
  • US equities rallied to begin the new week as the S&P 500 looks to recover following two consecutive weeks of losses for the index. Volatility has picked up in recent weeks as markets grapple with two primary risks - 1) the Omicron variant and what its spread could mean for the economy and 2) a hawkish pivot from the Federal Reserve that could see the central bank accelerate its tapering of asset purchases. While there was no obvious catalyst for Monday's rally, sentiment may have received a boost from comments over the weekend from Anthony Fauci, who suggested that initial data from South Africa were "a bit encouraging regarding the severity [of the variant]," though the President's chief medical adviser did caution it is too early to draw conclusions about Omicron risk. Looking ahead, markets will focus on continued Omicron developments, Friday's November CPI report and next week's FOMC meeting. 
  • All 11 S&P 500 sectors were higher on the session, with Industrials (+1.6%) and Consumer Staples (+1.6%) outperforming the broader market, while Information Technology (+1.0%) and Health Care (+0.5%) lagged.
  • Rates were higher across the curve, with the 10-year Treasury yield rising to 1.44% as of the 4 p.m. equity market close. Gold was modestly lower on the day while WTI was higher at nearly $70 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 gained 1.2%. With the rally, the S&P 500 has now recorded a 1% or greater move in six of the past seven trading sessions, four of which have been declines. Volatility has increased in recent weeks as risks related to the new Omicron variant and a hawkish pivot from the Federal Reserve pose near-term headwinds for markets and the economy. On the former, market sentiment may have received a boost over the weekend as initial reports out of South Africa do not seem to suggest Omicron poses more severe risks than prior variants, though it should be noted the data are preliminary and it will likely take several weeks to better understand the transmissibility and severity risks associated with Omicron. On the latter, expect speculation around the Fed's next move to intensify ahead of next week's FOMC meeting. Market internals were strong on Monday with all 11 S&P 500 sectors rallying and more than 85% of constituents ending the day higher. Treasury yields were also sharply higher across the curve, with the 10-year yield trading to 1.44% while 2-year yields tested their highest levels of the year. Looking ahead, expect markets to focus on continued Omicron developments this week, as well as inflation data ahead of next week's FOMC meeting with the November CPI release on Friday. 

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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