Wealth Management — November 30, 2021
- US stocks traded lower on Tuesday as the S&P 500 declined 1.9% to close at 4,567. With the sell-off, the index is now up 21.6% year to date.
- Volatility in equity markets continued on Tuesday, with the S&P 500 giving back all of Monday's rebound as the index declined 1.9%. After not posting a 1% move to either the upside or downside for over a month, the S&P 500 has now recorded a 1% or greater move for three straight sessions. Tuesday's move lower was driven in part by commentary from Federal Reserve Chair Jerome Powell to the Senate Banking Committee, in which he declared that the Fed could consider accelerating its tapering of bond purchases. Chair Powell appeared to offer a more hawkish view with regards to inflation than has been communicated in recent months and suggested that it may be appropriate to wrap up bond purchases a few months earlier than anticipated given recent inflation data. Equity losses accelerated following Chair Powell's commentary, while front-end yields moved higher. Outside of the Fed, concerns around the Omicron variant remain front and center for markets, as will economic data this week with Wednesday's ISM manufacturing release and Friday's November jobs report.
- All 11 S&P 500 sectors were lower on the session, with Information Technology (-1.0%) and Consumer Discretionary (-1.4%) outperforming the broader market, while Utilities (-2.9%) and Communication Services (-3.0%) lagged.
- Rates were mixed across the curve, with the 10-year Treasury yield falling to 1.44% as of the 4 p.m. equity market close. Gold was modestly lower on the day while WTI oil was sharply lower to just above $66 per barrel. The US dollar was modestly weaker on the trading session, as measured by the US Dollar Index.
Equity markets sold off sharply on Tuesday, as the S&P 500 gave back all of the prior day's gains, falling 1.9% to close at 4,567. With today's move lower, the index has now fallen 3.7% from the intra-day all-time high struck last week. Volatility has picked up, with the index recording a greater than 1% closing move for three straight sessions as markets navigate the risks posed by the Omicron variant, the debt ceiling and budget debate in Congress and the prospects and pace of Federal Reserve tightening. The latter appeared to drive market action on Wednesday, as comments from Federal Reserve Chairman Powell to the Senate Banking Committee struck a more hawkish tone than markets were expecting. The Fed chair signaled that the central bank could consider wrapping up its bond purchasing program sooner than previously expected in response to the recent uptick in inflation data and this sent front-end Treasury yields sharply higher during the session. Long-end yields actually moved lower, driving substantial yield curve flattening during the session, while equity markets sold off sharply, presumably on concerns that a more hawkish Fed could weigh on equities given elevated valuations. Expect speculation on Fed action to continue ahead of the December 14th-15th FOMC meeting. Looking ahead, markets will continue to focus on updates surrounding the Omicron variant, as well as a busy economic data calendar, with the ISM Manufacturing PMI due out Wednesday and the November nonfarm payrolls report on Friday.
Record stimulus and a stronger-than-expected US reopening have accelerated the shift from early to mid-cycle, lifting equity markets to new all-time highs. The continued economic momentum in global trade, manufacturing, corporate earnings, and housing have set the tone for strong US economic growth; however, this backdrop has been increasingly priced into markets. Index-level valuations peaked at more than 22x forward earnings and history suggests valuation multiples will trend lower as earnings improve, supporting our base case year-end 2022 target of 4,400 for the S&P 500 and our bull case of 5,000. With higher expectations and a move into mid-cycle, investors should upgrade their portfolios by dialing back extreme positioning and allocating more exposure toward high-quality cyclicals and growth at a reasonable price. With a potential long-term infrastructure bill in progress and the unleashing of pent-up demand for services-related spending, the US faces a potential favorable outlook for economic growth and inflation possibly rebounding to a 2.5%-3% range over the coming years. However, optimal navigation of this new business cycle will require care as Treasury rates appear likely to move higher toward 2% in the next year, creating a headwind for long-duration assets. With regard to stocks, our preferences for quality and valuation support warrant allocating to international stocks with less expensive valuations, 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 as the rolling global reopening continues. 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 high yield credit, preferreds, leveraged loans, asset-backed securities, including select mortgage-backed, and dividend-paying stocks. Real assets such as gold, infrastructure, and real estate present an attractive opportunity as a portfolio ballast for income generation and as an inflation hedge.
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 17US dollar against a subset of the broad index currencies that circulate widely outside the US.