Wealth Management — July 9, 2021
- US stocks traded higher on Friday as the S&P 500 rose 1.1% to close at 4,370. With the rally, the index is now up 16.3% year to date.
- After nearly three weeks without a 1% move in either direction, US stocks rose on Friday with ~95% of S&P 500 stocks ending higher. After a modest sell-off in the prior session, the S&P 500 recovered to trade to a new all-time high on Friday with cyclical equities leading the market higher. US Treasury yields moved higher throughout the day, partially reversing this week's sharp move lower in yields - with equities largely taking their cue from rates in recent sessions, the reversal in long-end Treasuries likely contributed to the equity rally. Looking ahead, volatility could increase as US investors continue to digest recent Fed rhetoric, the potential impact of COVID-19 variants, and the upcoming Q2 earnings season.
- All 11 S&P 500 sectors were higher on the session, with Financials (+2.9%) and Energy (+2.0%) outperforming the broader market, while Health Care (+0.4%) and Utilities (+0.2%) lagged.
- Rates were higher across the curve, with the 10-year Treasury yield at 1.36% as of the 4 p.m. equity market close. Gold was 0.3% higher on the day while WTI oil also closed higher to just under $75 per barrel. The US dollar was weaker on the trading session, as measured by the US Dollar Index.
US equities rebounded on Friday with the S&P 500 gaining 1.1% and pushing to new all-time highs. After nearly three weeks without a 1% move, volatility appears to be returning to US markets following the sharp move lower in 10-year Treasury yields, troughing at 1.25% earlier this week before rebounding on Friday. Growth and defensive equities have been the primary beneficiaries of the move lower in rates while rate-sensitive cyclicals have lagged. However, this trend saw a reversal on Friday as yields moved sharply higher, and likewise cyclical sectors led the equity market back to new highs. Market breadth was strong on Friday with all 11 sectors ending higher and ~95% of S&P 500 stocks positive on the day. After selling off sharply in recent sessions, Financials, Energy, and Materials were the top-performing sectors on the day. While the S&P 500 finishes the week at a new all-time high, a number of evolving narratives could contribute to more volatility in the weeks ahead, including continued debate around Fed policy and potential tightening, rising Delta variant cases of COVID-19, and the potential for peaking growth as the rate of change on economic and earnings data may begin to slow from extremely elevated levels in the second half of the year. Next week will offer new data for investors to digest with the start of Q2 earnings season, fresh CPI and PPI inflation readings, and key consumer sentiment and spending measures.
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..