Wealth Management — May 10, 2021
- US stocks traded lower on Monday as the S&P 500 declined 1.0% to close at 4,188. With the decline, the index is now up 11.5% year to date.
- US equities fell on Monday as weakness in technology stocks weighed on the broader index. Technology, the highest weighted sector in the S&P 500, fell 2.5% on the day. Monday's sell-off reverses all of the gains seen on Friday following the weaker-than-expected non-farm payrolls report. Defensive sectors were the top performers on the day while cyclical sectors finished flat to down. Commodities such as copper moved lower on the session while energy markets were in focus following a shutdown of a major US pipeline over the weekend. Looking ahead, markets have a busy week in economic data with fresh readings on inflation, sentiment, and retail sales.
- Five of the 11 S&P 500 sectors were higher on the session, with Utilities (+1.0%) and Consumer Staples (+0.8%) outperforming the broader market, while Consumer Discretionary (-2.0%) and Technology (-2.5%) lagged.
- Rates were higher across the curve, with the 10-year Treasury yield at 1.60% as of the 4 p.m. equity market close. Gold was 0.3% higher on the day while WTI oil closed flat at $65 per barrel. The US dollar was flat in the trading session, as measured by the US Dollar Index.
It was a soft start to the week for US equities as the S&P 500 fell more than 1% as weakness predominantly in technology / growth stocks weighed on markets. The tech-heavy NASDAQ 100 fell 2.6% on the session. There was no clear catalyst for the weakness in growth stocks; however, Monday's move appears to accelerate a rotation out of growth to value that has been in place for much of the year. Monday's market internals were healthier than headline weakness would suggest; 10-year Treasury yields actually climbed higher on the session, and more than 40% of S&P 500 constituents and five of the 11 sectors ended the day in the green. While on Friday markets shook off a weaker-than-expected April jobs report and the S&P 500 rallied to a new all-time high above 4,200, Monday's losses reversed all of those gains. The April non-farm payrolls report showed far fewer job additions than had been expected, with many economists suggesting the weakness in payroll growth may be a function of would-be job seekers who are potentially incentivized to remain on the sidelines given the current elevated levels of unemployment insurance. While we would hesitate to draw too many conclusions from one month's numbers that can also be subject to revisions, we expect markets to pay close attention to labor market data in the coming weeks and months as the state of the jobs market is likely to weigh heavily on the Federal Reserve as they contemplate future policy moves. Looking ahead, markets will see a busy week for economic data with fresh readings on CPI, consumer sentiment and retail sales all on the docket.
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 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 2021 support our base case year-end target of 3,900 for the S&P 500 and our bull case of 4,175. 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 24% 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 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.