Wealth Management — July 19, 2021
- US stocks traded sharply lower on Monday as the S&P 500 fell 1.6% to close at 4,259. With the sell-off, the index is now up 13.4% year to date.
- Monday's sell-off marks the worst daily loss for the S&P 500 since May. Weakness was likely triggered in part by growing concerns over the potential for rising COVID-19 cases globally as the rapidly spreading Delta variant has led to an uptick in case counts across several regions. Aside from the health crisis, markets continue to digest 2Q earnings results as well as economic data releases. Recent weakness may be a result of markets anticipating a slowing rate-of-change in growth as 2Q is likely to mark the peak in year-over-growth for both earnings and many economic data points. Cyclical sectors were particularly weak on Monday, as a sharp move lower in crude oil prices weighed on the Energy sector while lower Treasury yields appeared to weigh on Financials.
- All 11 S&P 500 sectors were lower on the session, with Consumer Staples (-0.3%) and Health Care (-1.1%) outperforming the broader market, while Financials (-2.8%) and Energy (-3.6%) lagging.
- Rates were lower across the curve, with the 10-year Treasury yield at 1.19% as of the 4 p.m. equity market close. Gold was virtually flat on the day while WTI oil closed sharply lower, to just above $66 per barrel. The US dollar strengthened on the trading session, as measured by the US Dollar Index.
US equities declined sharply on Monday as the S&P 500 lost 1.6%. Monday's move lower was the largest daily drawdown since May of this year and the first 1% down move in over a month. There are several developments that have likely weighed on markets in recent sessions. Perhaps most notably, growing concerns that the COVID-19 Delta variant could lead to a surge in cases that could upend recent re-opening momentum appears to be weighing on markets. Concerns over the latest virus data add to already growing concerns that economic momentum may be peaking as stimulus fades and year-over-year growth in various data points starts to subside given more challenging base effects in the second half of the year. While underneath the surface these concerns appeared reflected in markets in recent weeks as Treasury yields moved lower, equity market breadth narrowed and cyclical sectors underperformed, on Monday this weakness spread more broadly as all 11 S&P 500 sectors finished the day lower. With Monday's sell-off, the S&P 500 is still just 2.9% below its all-time high of last week, suggesting there could be more volatility ahead should concerns over the virus or broader economic growth persist. Energy stocks were notably weak on Monday alongside weakness in crude oil prices following an announcement from OPEC over the weekend that the group had come to agreement on supply hikes through the rest of the year. Financial stocks were also weaker, as has been the case in recent sessions, as long-end Treasury rates continue to move lower. Looking ahead, markets will continue to digest 2Q earnings results as well as a slew of housing data slated to be released throughout the week.
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 June 2022 target of 4,225 for the S&P 500 and our bull case of 4,450. 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, continued Fed accommodation, and the unleashing of pent-up demand for services-related spending, the US faces a potential favorable outlook for economic growth with 7%-8% real GDP this year 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 US dollar against a subset of the broad index currencies that circulate widely outside the US.