Wealth Management — March 3, 2021
- US stocks declined on Wednesday as the S&P 500 fell 1.3% to close at 3,820. With the decline, the index is now up 1.7% year to date.
- After a strong rally on Monday, markets traded lower on both Tuesday and Wednesday fully erasing the early week rebound. Market attention remains on the recent spike in Treasury volatility as higher 10-Year Treasury yields drive a wedge between cyclical and growth areas of the market. While cyclical sectors largely outperformed on Wednesday, and the Financials and Energy sectors each rallied near 1%, weakness in technology stocks weighed down the broader index. Underscoring the weakness in technology, the NASDAQ 100 fell nearly 3% on the session.
- Three of the 11 S&P 500 sectors ﬁnished the session higher, with Energy (+1.4%) and Financials (+0.8%) outperforming the broader market, while Consumer Discretionary (-2.4%) and Tech (-2.5%) lagged.
- Rates were higher across the curve, with the 10-year Treasury rising seven basis points on Wednesday, closing at 1.46% as of the 4 p.m. equity market close. Gold fell 1.3%, while WTI oil rose, at just over $61 per barrel. The US dollar strengthened modestly in the trading session, as measured by the US Dollar Index.
US equities fell on Wednesday as the S&P 500 slipped in afternoon trading for the second day in row, ending the session down 1.3%. While equities snapped back on Monday following last week's 2.5% S&P 500 decline, the now back-to-back losses for the index have erased all of the early week gains. Treasury yields continue to drive broader market action, with the recent move higher in long-end bond yields appearing to pressure higher-valued areas of the equity market. While higher yields appear to be a bond market pricing in better economic growth and inﬂation, and this in turn has beneﬁtted cyclically oriented equities like ﬁnancials, the move higher in yields has coincided with a sell-off in technology and broader growth stocks. While growth stocks had seen their valuations climb in recent years as markets adjusted to an ever lower interest rate environment, the recent sharp reversal in 10-year Treasury yields may be reversing this trend. To this extent, the NASDAQ 100, which rallied nearly 50% last year, is now in negative territory year-to-date after Wednesday's near 3% sell-off, and down 8% from last month's high. While perhaps not a key driver of Wednesday's market action, a busy week of economic data continued with both the ISM Services reading and the ADP employment change report coming in below expectations. Labor market data will remain in focus with Thursday's weekly claims release and Friday's February non-farm payrolls report. Expect market attention to remain on rates markets, with Fed Chair Jerome Powell scheduled to offer remarks on the US economy at a virtual event hosted by The Wall Street Journal Thursday afternoon.
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.