Wealth Management — February 24, 2021
- US stocks traded higher on Wednesday as the S&P 500 rallied 1.1% to close at 3,925. With the rally, the index is now up 4.5% year to date.
- While surging long-end bond yields appeared to weigh on markets over the past week, with high-valuation growth stocks coming under the most pressure, equity markets have stabilized over the past two sessions as the S&P 500 has snapped a five session string of losses with back-to-back rallies. Cyclical sectors have led the market, both during the sell-off as well as this week's subsequent recovery. Technology stocks also recovered on Wednesday following a sharp intra-day reversal in yields - the 10-year yield traded as high as 1.44% this morning before settling back near 1.38%. Continued dovish commentary from Federal Reserve Chairman Jerome Powell may have contributed to Wednesday's market action.
- Nine of the 11 S&P 500 sectors finished the session higher, with Energy (+3.6%) and Financials (+2.0%) outperforming the broader market, while Consumer Staples (0.0%) and Utilities (-1.2%) lagged the broader market.
- Rates were higher across the curve, with the 10-year Treasury flat on the day, closing at 1.38% as of the 4 p.m. equity market close. Gold fell 0.2%, while WTI oil was higher, at over $63 per barrel. The US dollar weakened modestly in thetrading session, as measured by the US Dollar Index.
US stocks rose on Wednesday as the S&P 500 gained 1.1%. This week opened with the fifth straight daily loss for both the S&P 500 and Nasdaq 100 indices on Monday, as a sharp back up in Treasury yields pressured equity valuations. While equity markets continued to fall into the open on Tuesday morning, losing nearly 2% versus Monday's close, a sharp intraday reversal took hold which saw the index close in positive territory. That momentum continued into Wednesday, with the S&P 500 staging its first 1% move higher since February 4. In testimony to Congress over the past two days, Federal Reserve Chair Jerome Powell reiterated that the Fed would remain accommodative as they strive to help gear the economy back towards full employment. Though there didn't appear to be any new headlines out of the Fed Chair's testimony, perhaps his dovish commentary helped buoy sentiment following the recent string of equity market weakness. While growth and technology stocks were hit the hardest in recent weeks as a steep rise in Treasury yields pressured valuations, Wednesday's intra-day reversal in yields was enough to see technology rally, with the sector outperforming on the session. The S&P 500 Energy sector led all 11 sectors however, gaining nearly 4% as WTI oil reached its highest level since January of 2020 at over $63 per barrel. To close the week, economic data out Thursday includes US initial jobless claims, as well as Friday's personal income and spending releases.
Record and unprecedented stimulus from both the Fed and Congress has unleashed a V-shaped recovery in global trade, manufacturing, goods retailing, and housing. That momentum, cupled with the resolution of the US Presidential election and much better-than-expected initial trial outcomes for COVID-19 vaccines, has lifted equity markets to new all-time highs. Although investors are correct to be concerned about index level valuations, which have reached multi-decade extremes at more than 22x forward earnings, the economic and profit dynamics in 2021 could support another 5%-10% gain to 3,900 for the S&P 500. Another round of fiscal stimulus, continuing Fed accommodation, and swelling pent-up demand for consumer services, may also support economic growth acceleration to 5%-6% real GDP, with inflation rebounding to more than 2%, a scenario that should support 27% year-over-year profit gains. However, optimal navigation of this burgeoning new business cycle will require care as Treasury rates are likely to move higher, creating a headwind for long-duration assets. In stocks, our preferences remain focused on quality and valuation support, attributes that remain in small caps, international stocks 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, supporting the case for emerging markets and commodities. 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 corporate credit (IG and HY), preferreds, leveraged loans, asset-backed securities, including select mortgage-backed, and dividend-paying stocks. Capital preservation and portfolio hedging from equity volatility may be achieved with a combination of cash and ultra-short duration instruments, and absolute return hedge funds. Real assets like gold, infrastructure and real esta te for inflation support should be bought opportunistically.
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.
VIX: This is a trademarked ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 Index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market’s expectation of stock market volatility over the next 30-day period.