Wealth Management — September 20, 2021
- US stocks traded lower on Monday as the S&P 500 declined 1.7% to close at 4,358. With the sell-off, the index is now up 16.0% year to date.
- After two consecutive weekly declines across US equity indexes, the trend lower accelerated on Monday as global equities sold off sharply to start the week. Monday's slide marks the worst day for the index in four months. There were several culprits in play driving Monday's weakness. First, investor attention on China has intensified in recent days as reports of a large property company facing liquidity issues have amplified concerns about the health of the Chinese economy and potential spill-over effects on financial markets. Back in the US, policymakers are also in focus as Congress continues to negotiate a potential budget deal that could drive changes in tax policy while the Federal Reserve's September meeting is also on tap this week. Finally, technical factors may have contributed to the sell-off, with Monday's slide coming as the S&P 500 broke below it's 50-day moving average, a level that has been watched closely by many traders as it has largely held as support in 2021.
- All 11 S&P 500 sectors were lower on the session, with Utilities (-0.2%) and Real Estate (-0.6%) outperforming the broader market, while Consumer Discretionary (-2.4%) and Energy (-3.0%) lagged.
- Rates were lower across the curve, with the 10-year Treasury yield at 1.31% as of the 4 p.m. equity market close. Gold moved higher on the day while WTI oil was lower to under $71 per barrel. The US dollar was flat on the trading session, as measured by the US Dollar Index.
US equities sold off sharply to begin the week, as the S&P 500 recorded its third worst session of 2021. Monday's losses follow back-to-back weekly declines for the index, bringing the index to a near 5% cumulative loss since the early September all-time high. Selling was broad-based, with all eleven S&P 500 sectors declining on the session and more than 90% of S&P 500 constituents ending the day lower. Monday's slide appeared in part driven by concerns over China, as a large Chinese property developer has come under pressure in recent weeks, in turn raising concerns about the health of the Chinese economy. With many Asian markets closed for the mid-autumn festival holiday on Monday, US markets may have born the brunt of investors seeking to de-risk on China slowdown concerns. US policymakers also may be a source of volatility this week, as markets await the outcome of budget negotiations in Congress as well as the September FOMC meeting on Wednesday. While markets have grown accustomed to record levels of fiscal and monetary stimulus in recent quarters, the tide may be turning as Congress discusses potential tax hikes and the Federal Reserve contemplates tapering its asset purchase program. Finally, technical factors may have played a part in Monday's sell-off, as the S&P 500 closed below its 50-day moving average last Friday - the 50-day moving average has been closely watched by traders as it has served as support for the index on weakness for much of the year and Friday's break may have accelerated selling. Looking ahead, Wednesday's FOMC meeting is likely to be the key catalyst this week as investors position into the end of the third quarter next week.
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.