Wealth Management — May 12, 2021
- US stocks traded lower on Wednesday as the S&P 500 declined 2.2% to close at 4,063. With the decline, the index is now up 8.2% year to date.
- Wednesday marks three days in a row of selling for the major averages, with growth stocks again the big laggard. The Nasdaq 100 fell 2.6% on the session and tech stocks have fallen over 5% in this week's trading alone. Wednesday's culprit appeared to be growing concern over rising inflation and higher interest rates, as the April CPI reading came in well above already-high market expectations, with year-over-year headline CPI coming in at 4.2% vs 3.6% expected, the highest level since 2008. Wednesday's move lower was not exclusive to growth stocks with nearly 95% of the S&P 500 falling on the day and Energy as the only positive sector at market close. Looking ahead, Thursday's PPI and jobless claims data will be closely watched given the recent market focus on inflation and labor data.
- Ten of the 11 S&P 500 sectors were lower on the session, with Energy (+0.1%) and Health Care (-1.0%) outperforming the broader market, while Information Technology (-2.9%) and Consumer Discretionary (-3.3%) lagged.
- Rates were higher across the curve, with the 10-year Treasury yield at 1.69% as of the 4 p.m. equity market close. Gold was 0.9% lower on the day while WTI oil closed higher at $66 per barrel. The US dollar strengthened in the trading session, as measured by the US Dollar Index.
US equities fell sharply for the third day in a row as the S&P 500 moved 2.2% lower with growth-style equities pacing the declines. The Nasdaq 100 fell 2.6% on the day and has moved over 5% lower in this week's trading alone. Rising interest rates may be pressuring stocks this week, with the 10-year Treasury yield now up more than 20 basis points from its low following last Friday's disappointing jobs report, settling near 1.69% at session's end. Wednesday's jump in yields appeared to be triggered by the April CPI reading, which showed headline consumer prices rose 4.2% year-over-year and 0.8% month-over-month, both well above expectations. Selling in equity futures accelerated following the CPI release and stocks drifted lower throughout the session with the major averages closing near their lows for the day. Similar to Tuesday, the selloff was not exclusive to growth stocks and was broad based with nearly 95% of S&P 500 stocks ending the session lower. Energy was the only sector to finish positive on the day following a report showing a sharp decline in US oil exports, pushing oil higher to $66 per barrel. Looking ahead, Thursday's PPI inflation reading and jobless claim data will be closely watched given the recent market focus on rising costs and difficulty in enticing workers to return to the labor force.
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