Wealth Management — October 4, 2021
- US stocks traded lower on Monday as the S&P 500 fell 1.3% to close at 4,300. With the sell-off, the index is now up 14.5% year to date.
- Monday's move continues what has been a more volatile stretch of trading in recent weeks, with the S&P 500 now down 5.4% from its early September all-time high. As has been the case in recent sessions, technology and growth-oriented stocks paced the market lower, while cyclical sectors generally outperformed on the session. Energy (+1.6%) was the top-performing sector on the day as oil prices rallied following an announcement from OPEC+ that the group would stick to its output hikes as scheduled next month and not further increase supply despite recent tightness in energy markets. Looking ahead, focus will remain on Washington, D.C., as Congress continues to negotiate over the infrastructure package, debt ceiling and budget; on the data-front, Friday will see the release of the September jobs report and next week will mark the beginning of 3Q earnings season.
- Eight of the 11 S&P 500 sectors were lower on the session, with Energy (+1.6%) and Utilities (+1.4%) outperforming the broader market, while Communication Services (-2.1%) and Technology (-2.4%) lagged.
- Rates were higher across the curve, with the 10-year Treasury yield at 1.48% as of the 4 p.m. equity market close. Gold was slightly higher on the day while WTI oil was higher at nearly $78 per barrel. The US dollar was modestly weaker on the trading session, as measured by the US Dollar Index.
US equities sold off to start the week, with the S&P 500 trading 1.3% lower and bringing the index's cumulative losses to more than 5% from the early September high. This now marks the largest sell-off for US equity markets in 2021. Equity markets have consolidated in recent weeks following a historic rally that saw the S&P 500 rise more than 100% off of the March 2020 lows through the early September high. Several issues seem to be weighing on the market recently, among them: concerns over rising Treasury yields and tighter monetary policy pressuring valuations; uncertainty out of Washington, D.C., as Congress negotiates over the debt ceiling, infrastructure package and budget; the potential for earnings disappointments given recent supply chain disruptions; and the potential for financial or economic spillover effects given recent weakness in China. While Monday's rise in Treasury yields was relatively modest in comparison to recent moves, the skew within equity styles was notable. Defensives were the relative outperformers while growth-oriented equities lagged, with Communication Services and Technology both falling over 2%. Bucking the trend Monday, Energy (+1.6%) shares jumped sharply alongside a rise in crude oil prices, as a meeting of OPEC+ ministers resulted in the group sticking to its previously scheduled production hike for next month. Energy markets rallied on this news as there was some expectation that the group would choose to further accelerate supply increases given recent tightness across energy markets. Turning to Washington, D.C., policy remains an overhang on markets as lawmakers continue to negotiate over a potential debt ceiling increase, infrastructure bill passage, and budget reconciliation. Looking to the week ahead, Tuesday's ISM Services will provide the next look into the service-based reopening while Friday's non-farm payrolls report will be closely watched for further momentum in the labor market recovery following the early September expiry of extended federal unemployment benefits.
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.