The 1% Move Report

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






Wealth Management — January 7, 2021

What Happened in the Markets?

  • US stocks traded higher Thursday as the S&P 500 rose 1.5% to close at 3,804.  
  • US equities moved higher for the third consecutive day on Thursday as investors gauged the impact of Tuesday's election in Georgia, which resulted in Democrats picking up two seats in the Senate, effectively delivering a "Democratic sweep" with Democrats holding control of the White House and both chambers of Congress. The pro-cyclical trade appears to have picked up steam on the back of election results, with equities and rates moving higher in each of the past two sessions as markets may be anticipating more fiscal stimulus under the new government regime. Economic releases may also have helped inspire Thursday's rally, with initial jobless claims and ISM services both coming in better than expectations.
  • Nine of the 11 S&P 500 sectors were higher, with Information Technology (+2.7%) and Consumer Discretionary (+1.8%) outperforming the broader market, while Consumer Staples (-0.3%) and Utilities (-1.3%) lagged the broader market. 
  • Rates were higher across the curve, with the 10-year Treasury yield rising to 1.08% as of the 4 p.m. equity market close. Gold was modestly lower, while WTI oil moved higher to nearly $51 per barrel. The US dollar strengthened modestly in the trading session, as measured by the US Dollar Index.

Catalysts for Market Move

US stocks traded higher on Thursday as the S&P 500 gained 1.5%. With the rally, the S&P 500 has fully recovered Monday's 1.5% loss and the now three-day rally sees the index close above 3,800 for the first time in history. Following Tuesday's surprise election results in Georgia, in which Democrats won both Senate seats, Democrats now have control of the US Senate, and markets have continued their pro-cyclical bend from late last year; equities have traded higher, led by cyclical sectors, while Treasury yields jumped sharply. Clearly, there was a pro-cyclical impulse in markets ahead of the election results, but perhaps these gains have accelerated in recent sessions as markets look to what could be more stimulus coming from a new government in Washington. While equity gains were pared somewhat Wednesday afternoon as the events at the Capitol unfolded, markets quickly recovered to trade to new all-time highs on Thursday. While on Wednesday the Technology sector was the laggard, perhaps a result of market anxiety over what the blue sweep could mean for tech regulation, on Thursday the sector bounced back, ending the session up nearly 3% as the top-performing S&P 500 sector. Treasury rates continued their recent move higher, with the 10-year yield now at 1.08% - it's highest level since last March. Looking ahead, Friday will see the release of the December non-farm payrolls report, with the consensus forecast calling for +50,000 job additions last month.

The Global Investment Committee’s Outlook

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, coupled 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 estate 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.

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