Wealth Management — March 5, 2021
- US stocks rallied on Friday as the S&P 500 gained 2.0% to close at 3,842. With the advance, the index is now up 2.3% year to date.
- Friday's rally snaps a three-day string of losses for the S&P 500 and leaves the index 0.8% higher on the week. It was a volatile session for equities that saw the S&P 500 decline by as much as 1% in morning trading before an intraday reversal took hold that saw the index rally sharply, closing near its high for the session. Rates surged in early-morning trading following a strong February payrolls release that showed the US economy added 379,000 jobs last month. While the better-than-expected labor market news should be welcomed, the move higher in yields appeared to trigger equity market selling, following the script of recent sessions. However, following the initial spike, yields quickly peaked and moved lower throughout the session and stocks recovered as yields stabilized.
- All 11 S&P 500 sectors ﬁnished the session higher, with Energy (+3.9%) and Industrials (+2.4%) outperforming the broader market, while Real Estate (+1.2%) and Consumer Discretionary (+0.7%) lagged.
- Rates were mixed across the curve, with the 10-year Treasury ending ﬂat after spiking to 1.62% intraday, closing at 1.56% as of the 4 p.m. equity market close. Gold rose 0.1%, while WTI oil moved sharply higher, at just over $66 per barrel. The US dollar strengthened modestly in the trading session, as measured by the US Dollar Index.
US equities rallied on Friday as the S&P 500 traded 2.0% higher. With Friday's rally, the S&P 500 snaps a three-day string of losses, and ends the week 0.8% higher. The rally is perhaps made more impressive given the fact the index traded more than 1% lower Friday morning, as it appeared rising yields would once again put pressure on stocks. However, as yields stabilized throughout the session so did stocks, and an afternoon rally took hold with the S&P 500 closing near its high for the session with more than 90% of index constituents participating in the rally. The tone for the session was set before equity trading began on Friday, with a much stronger-than-expected February non-farm payrolls release, which showed the US economy added 379,000 jobs last month versus expectations for 200,000 job additions. It would appear that vaccination progress and re-opening is driving re-hiring in the services sector and we expect this momentum to continue in the months ahead. Looking into sector performance, there was less of a dispersion between relative leaders and laggards on the day with all 11 sectors in the green. Energy was the relative outperformer, up 3.9%, as oil prices broke through $66 per barrel, while consumer discretionary was the relative underperformer, but still positive on the day. Looking ahead, stimulus remains in focus as the Senate considers the latest virus relief 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.