The 1% Move Report

Wealth Management — July 23, 2021

• US stocks traded higher on Friday as the S&P 500 rose 1.0% to close at 4,412. With the rally, the index is now up 17.5% year to date.   
• US equity markets rallied on Friday as the S&P 500 pushed through 4,400 to make new all-time highs. After having the largest daily loss since May on Monday, the S&P 500 rallied four straight days to close 1.0% higher on the week. A strong Friday in European markets may have contributed to US futures opening higher, which carried into the US market trading session. The July reading of Markit PMIs reported ahead-of-consensus expectations in Manufacturing but lower-than-expected progress with Services - highlighting the harder-than-expected services reopening with the emergence of the Delta variant and current labor supply shortages. Communication Services was the top-performing sector as key large cap media companies reported stronger-than-expected earnings and potentially foreshadowed further earnings strength from other megacap peers. With over 20% of the S&P 500 earnings reported, Q2 earnings are off to a strong start but market reactions have been muted given the higher bar for expectations.
• Ten of 11 S&P 500 sectors were higher on the session, with Communication Services (+2.7%) and Utilities (+1.3%) outperforming the broader market, while Financials (+0.1%) and Energy (-0.4%) lagged. 
• Rates were near flat across the curve, with the 10-year Treasury yield at 1.28% as of the 4 p.m. equity market close. Gold was slightly lower on the day while WTI oil closed higher to $72 per barrel. The US dollar was flat on the trading session, as measured by the US Dollar Index. 

US markets rallied on Friday as the S&P 500 gained 1.0% to push through 4,400, marking the 40th new high for the index in 2021. Markets started off with a jittery start to this week, as growth fears sparking from the recent uptick in Delta variant COVID-19 cases caused a sell-off across global equity markets Monday. However, the sell-off was short-lived, with US and European equity markets rallying for four straight sessions to close out the week. As was the case in recent sessions, there was no clear catalyst for Friday's rally, but perhaps strength in European equity markets in the early morning session carried over optimism into US markets heading into the weekend. Large and mega cap equities were the primary beneficiaries of Friday's move as Q2 earnings reports from large cap media companies were constructive. With the stronger-than-expected reports, the bullish price action spilled over into similar megacap peers, contributing to a near 3% daily gain for the Communication Services sector. Overall, Q2 expectations have provided a high bar for share price appreciation while earnings misses, although largely absent, have seen significant downside reactions. The July reading of Markit PMIs also reported on Friday and saw mixed results. Manufacturing printed higher than expected while Services fell below high expectations - potentially pointing to the harder-than-expected reopening with global travel restrictions, the rise in the Delta variant, and the current labor supply shortage. Unlike recent sessions, the Treasury curve was little changed on Friday after seeing volatile trading earlier in the week. Looking ahead, markets will enter the busiest week of the Q2 reporting season with over 50% of S&P 500 by market cap reporting earnings. In addition, the Fed will hold its July FOMC meeting which will be closely watched for any discussion around the eventual tapering of asset purchases. 

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.