The 1% Move Report

Wealth Management — October 14, 2021

• US stocks traded higher on Thursday as the S&P 500 rose 1.7% to close at 4,438. With the rally, the index is now up 18.2% year to date.   
• US equities moved higher for the second day in row as markets look to recover from September weakness. The S&P 500 moved 1.7% higher on Thursday, marking the strongest return since March and bringing the index back to within 3% of the early September all-time high. Perhaps the start of earnings season helped catalyze Thursday's rally, as strong results from a number of banks in the past two days buoyed markets; earnings season will heat up in the coming weeks as more companies from various sectors report third-quarter results. This week's rally in Treasuries, with the 10-year Treasury yield falling back toward 1.5%, may also be helping equities, a reversal from earlier this month when higher yields appeared to weigh on the major averages. Looking ahead, Friday's retail sales and University of Michigan Consumer Sentiment will provide a current look at the state of the US consumer, and earnings season will continue next week with 15% of the S&P 500 by market cap scheduled to report results. 
• All 11 S&P 500 sectors were higher on the session, with Materials (+2.4%) and Information Technology (+2.3%) outperforming the broader market, while Consumer Staples (+1.1%) and Consumer Discretionary (+1.0%) lagged. 
• Rates were mixed across the curve, with the 10-year Treasury yield at 1.51% as of the 4 p.m. equity market close. Gold was modestly higher on the day while WTI oil was also higher at $81 per barrel. The US dollar was modestly weaker on the trading session, as measured by the US Dollar Index. 

The S&P 500 posted a strong 1.7% rally on Thursday as US equities look to recover following a 5% correction in September. Q3 earnings season has kicked off with a number of banks reporting this week; results have largely been ahead of expectations with bank commentary particularly strong around the investment banking environment and credit trends. While loan growth has been lackluster, several banks forecasted an improving lending environment in the months ahead and this may have contributed to Thursday's broad market rally. Despite earnings beats, Financials have been the the worst-performing sector over the past two sessions, with the move lower in Treasury yields likely offsetting any enthusiasm following Q3 reports. While lower Treasury yields this week may have held back bank stock performance, it has been good for the market at large as Materials and the Technology sector surged more than 2% on the session; just as higher Treasury yields weighed on markets in recent weeks, this week's move back toward 1.5% on the 10-year Treasury may be contributing to the equity rally. Thursday's weekly jobless claims report may also have boosted sentiment, with initial claims falling below 300,000 for the first time since the pandemic began last spring. Looking ahead, Friday's retail sales report and the University of Michigan Consumer Confidence release will provide a current look on the state of the US consumer and markets will also be focused on earnings season next week with 15% of the S&P 500 by market cap scheduled to report results.

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 June 2022 target of 4,225 for the S&P 500 and our bull case of 4,450. 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, continued Fed accommodation, and the unleashing of pent-up demand for services-related spending, the US faces a potential favorable outlook for economic growth with 7%-8% real GDP this year 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.