Wealth Management — March 11, 2021
- US stocks rallied on Thursday as the S&P 500 gained 1.0% to close at 3,939. With the rally, the index is now up 4.9% year to date.
- Thursday's move higher brings the S&P 500 to a new all-time high, the first new closing high since February 12. Technology stocks bounced back again on Thursday and led the market higher. However, a late-session sell-off did see the major averages close well off their intra-day highs, and breadth was also poor with only 60% of S&P 500 members participating in the rally. It was a volatile session for Treasuries, with the 10-year yield moving as low as 1.47% in early morning trading before trading as high as 1.55% intra-day, though yields ended the session little changed from the day before at 1.52%. While not incremental news, perhaps sentiment saw a boost on Thursday as the President signed into law the $1.9 Trillion COVID-19 relief bill.
- Eight of the 11 S&P 500 sectors finished the session higher, with Information Technology (+2.1%) and Communication Services (+1.8%) outperforming the broader market, while Utilities (-0.3%) and Financials (-0.3%) lagged.
- Rates were mixed across the curve, with the 10-year Treasury yield flat at 1.52% as of the 4 p.m. equity market close. Gold was also flat, while WTI oil closed higher, at $66 per barrel. The US dollar weakened modestly in the trading session, as measured by the US Dollar Index.
US equities rallied on Thursday as the S&P 500 traded 1.0% higher. Thursday's rally puts the S&P 500 at a new all-time high, with the previous all-time high surpassed from February 12 of this year. Equity markets continue to recover this week after recent volatility in rates markets appeared to drive a rotation out of growth and technology stocks that resulted in the NASDAQ 100 falling more than 10% from its high last month. In recent sessions, technology stocks have bounced back and that was the case on Thursday with the NASDAQ 100 rallying more than 2% while the S&P 500 technology sector was the strongest-performing sector on the session. While perhaps not the specific catalyst for Thursday's rally, sentiment may have received a boost this week as Congress cleared and the President signed into law the latest COVID-19 relief bill, which will provide $1.9 trillion in additional stimulus. With the bill enacted, stimulus payments to eligible individuals will begin as soon as this weekend, and this additional spending power could contribute further to the recovery in consumer spending. Looking ahead, markets are likely to focus on next week's March FOMC meeting, where investors will be looking for clues as to the Fed's reaction to the recent move higher in Treasury yields.
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 support our base case year-end target of 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 7%-8% 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.