Wealth Management — May 13, 2021
- US stocks traded higher on Thursday as the S&P 500 rose 1.2% to close at 4,113. With the rally, the index is now up 9.5% year to date.
- Following three straight days of losses, US equities rebounded on Thursday with the S&P 500 gaining 1.2%. There was no clear catalyst for the reversal; however, after rising Treasury yields and growing concerns around inflation appeared to pressure equities through much of the week, Thursday's move lower in yields may have triggered the equity rally. While inflation data came in hotter than expected with the April PPI reading coming in above expectations, Treasury yields moved lower following the release, perhaps suggesting inflation concerns have already been priced in for the near term with this week's moves. Markets rallied broadly with nearly 90% of S&P 500 stocks finishing higher on the day and most major indexes finishing 1% higher.
- Ten of the 11 S&P 500 sectors were higher on the session, with Industrials (+1.9%) and Financials (+1.9%) outperforming the broader market, while Consumer Discretionary (+0.7%) and Energy (-1.4%) lagged.
- Rates were lower across the curve, with the 10-year Treasury yield at 1.65% as of the 4 p.m. equity market close. Gold was 0.6% higher on the day while WTI oil closed lower at $64 per barrel. The US dollar was flat on the trading session, as measured by the US Dollar Index.
US equities moved higher on Thursday with the S&P 500 gaining 1.2% following three consecutive days of equity market weakness. Coming into Thursday's session, the S&P 500 and NASDAQ 100 were 3% and 4% lower on the week, respectively, as the outlook for higher inflation weighed on markets and growth-style equities, in particular. Thursday morning's April PPI was higher than expected at 6.2% YoY and 0.6% MoM, similar to Wednesday's CPI report, but markets rebounded in Thursday's session, perhaps suggesting that the outlook for higher inflation may have already been priced earlier in the week. In a near mirror image of Wednesday's trading, equity market breadth was strong on Thursday with nearly 90% of the S&P 500 stocks trading higher on the day and with Energy as the only sector finishing in the red. Oil moved lower on the day, perhaps impacted by the partial reopening of a key US pipeline. Treasury yields also moved lower on the day despite a better-than-expected jobless claims reading, but the move partially reversed following a weaker-than-expected 30-year Treasury auction. Turning to Friday, markets have no shortage of economic data to digest with new readings on retail sales, import/export prices, industrial production, and University of Michigan consumer sentiment all reporting in the morning.
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.