Wealth Management — June 21, 2021
- US stocks traded higher on Monday as the S&P 500 rose 1.4% to close at 4,225. With the rally, the index is now up 12.5% year to date.
- After nearly a month without a 1% move on the S&P 500, equities have now had back-to-back sessions of sharp moves in both directions. On Friday, stocks sold off as markets continued to digest a relatively hawkish Federal Reserve following their Wednesday FOMC meeting. On Monday, markets rebounded, paring all of Friday's losses and more, with cyclical sectors leading the market higher. Markets could continue to react to commentary from members of the Fed this week, with a host of board members slated to speak throughout the week.
- All 11 S&P 500 sectors were higher on the session, with Energy (+4.3%) and Financials (+2.4%) outperforming the broader market, while Communication Services (+0.9%) and Consumer Discretionary (+0.5%) lagged.
- Rates were higher across the curve, with the 10-year Treasury yield at 1.49% as of the 4 p.m. equity market close. Gold was 1.1% higher on the day while WTI oil also closed higher to just under $74 per barrel. The US dollar was modestly weaker on the trading session, as measured by the US Dollar Index.
The S&P 500 gained 1.4% on Monday, as markets reversed Friday's sharp move lower and look to recover from last week's losses. Last week, the S&P 500 sold off 1.9% as investors reacted to a more hawkish than expected Federal Reserve at its June FOMC meeting. Last week's FOMC release hinted that the committee is moving closer to tightening monetary policy, with the Fed's median "dot plot" signaling two rate hikes in 2023. The dot plot, which is a tool for providing forward guidance on monetary policy, previously showed no interest rate hikes until 2024. In equity markets, inflation and cyclically sensitive sectors sold off as the outcome of the FOMC meeting resulted in yields at the short end of the curve rising sharply while back-end yields moved materially lower. While cyclical sectors suffered, growth and technology stocks benefitted from the recent move in rates. To start off this week however, part of that recent rally in the Treasury bonds was reversed, with long-end yields moving sharply higher Monday and two-year yields flat. As a result, cyclical sectors led the rebound for the broad indices, with the Energy sector gaining over 4% while Financials gained over 2%. Volatility in markets could be further swayed by Fed policy this week, with many Fed members scheduled to speak on the path of monetary policy throughout the week. In economic data for the week, we will be seeing housing data and Markit PMIs on Tuesday and Wednesday, while consumer sentiment, weekly jobless claims and PCE deflator data will be reported in the back half of the week.
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 much better-than-expected rollout of 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 the year ahead support our base case June 2022 target of 4,225 for the S&P 500 and our bull case of 4,450. Additional fiscal stimulus, continuing Fed accommodation, and swelling pent-up demand for consumer services, may also support economic growth to 7%-8% real GDP in 2021, with inflation rebounding to more than 2%. However, optimal navigation of this new business cycle will require care as Treasury rates appear 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 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.