Wealth Management — March 4, 2021
- US stocks declined on Thursday as the S&P 500 fell 1.3% to close at 3,768. With the decline, the index is now up 0.3% year to date.
- After a strong rally on Monday, markets have now traded lower for three consecutive sessions. With Thursday's decline, the S&P 500 is now 4.2% below its all-time high reached in mid February, while the Nasdaq 100 has sold off 9.7% from its February high. After spending most of the morning little changed, stocks retreated sharply following comments from Federal Reserve Chairman, Jerome Powell, at a conference this afternoon. While the Fed chair largely reiterated previously stated Fed policy as it relates to their approach to accommodation, markets may have been hoping for more of a reaction to the recent climb in long-end yields. Following the Fed chair's remarks, 10-year Treasury yields surged above 1.50%, which appeared to catalyze the selling in equities.
- Nine of the 11 S&P 500 sectors ﬁnished the session lower, with Energy (+2.5%) and Communication Services (+0.03%) outperforming the broader market, while Materials (-2.1%) and Information Technology (-2.3%) lagged.
- Rates were mixed across the curve, with the 10-year Treasury rising six basis points on Wednesday, closing at 1.54% as of the 4 p.m. equity market close. Gold fell 0.7%, while WTI oil moved sharply higher, at just over $64 per barrel. The US dollar strengthened modestly in the trading session, as measured by the US Dollar Index.
US equities declined on Thursday as the S&P 500 closed down 1.3%. It was the third consecutive day of losses for the index, with ﬁve of the past six sessions now ending with declines. Treasury yields continue to remain at the epicenter of recent market positioning, with today's spike higher in yields the likely culprit for equity market weakness. In remarks at a virtual conference Thursday afternoon, Fed Chair, Jerome Powell, largely reiterated previous views in response to questions surrounding how the Fed views the recent move higher in long-end Treasury yields. While there was little new in the Fed chair's response, perhaps markets had been hoping for more reaction and Treasuries sold off sharply following the event. As 10-year Treasury yields surged through 1.50%, equities sold off in-kind, with outsized weakness in highly valued growth stocks that have borne the brunt of selling in recent weeks. The NASDAQ 100 dipped into 10% correction territory intra-day, though the index did rally into the close to settle down 9.7% from last month's high. While higher rates may be putting pressure on equity valuations, it is important to remember that bond yields appear to be rising for the right reasons―rising expectations surrounding economic growth and inﬂation, and at 1.54%, the 10-year Treasury is still well below pre-COVID levels, having started 2020 at 1.92%. Looking ahead, Friday will see the release of the February non-farm payrolls report with the consensus estimate calling for 195,000 jobs added last month. Focus will also remain on Washington D.C., as the Senate takes up debate on the latest stimulus package.
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.