The 1% Move Report

Wealth Management — May 20, 2021

• US stocks traded higher on Thursday as the S&P 500 rose 1.1% to close at 4,159. With the rally, the index is now up 10.7% year to date.   
• After three straight days of losses to start the week, the S&P 500 rallied on Thursday. While there was no clear catalyst for today's rebound, initial jobless claims reported for the prior week fell to a new pandemic low and also came in below the consensus expectations. With Treasury rates also moving lower on the day, the rally was led by growth and technology stocks, which have recently underperformed as inflation cast concerns across markets. The Energy sector continued its underperformance this week, as oil prices hit a three-week low.    
• Ten of the 11 S&P 500 sectors were higher on the session, with Information Technology (+1.9%) and Communication Services (+1.7%) outperforming the broader market, while Materials (+0.1%) and Energy (-0.1%) lagged. 
• Rates were lower across the curve, with the 10-year Treasury yield at 1.63% as of the 4 p.m. equity market close. Gold was 0.4% higher on the day while WTI oil closed lower to $62 per barrel. The US dollar was modestly weaker on the trading session, as measured by the US Dollar Index.

The S&P 500 moved higher for the first time this week on Thursday, recording a 1.1% gain. The index fell 1.4% in the first three days of trading this week as volatility came into the forefront from factors mostly outside of market fundamentals, including a sharp sell-off in cryptocurrencies over the weekend and on Wednesday. Nonetheless, a rebound today was led by technology and mega-cap growth stocks, as initial jobless claims fell to a fresh pandemic low of 444,400, which seemed to help buoy sentiment. While tech stocks performed well Thursday, the S&P 500 Energy sector was the only sector with a negative return, as WTI oil fell to $62 per barrel, down 5.1% on the week. With Q1 earnings season all but behind us, markets will continue to be focused on the potentially higher inflationary backdrop that has negatively impacted equity multiples in recent weeks, as well as the acceleration of newly reported economic data as the recovery approaches 14 months in duration. To close out the week, economic data scheduled to be released Friday includes Markit PMIs and existing home sales. 

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 to 7%-8% real GDP, with inflation rebounding to more than 2%, a scenario that should support 24% year-over-year gains. However, optimal navigation of this 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.