Wealth Management — September 28, 2021
What Happened in the Markets?
- US stocks traded lower on Tuesday as the S&P 500 lost 2.0% to close at 4,353. With the sell-off, the index is now up 15.9% year to date.
- US equities have seen a soft start to this week with now two consecutive days lower. Tuesday's move lower was the largest daily loss for the NASDAQ 100 since March and since May for the S&P 500. Today's decline appeared to be stemmed by a continued sell-off in the fixed income markets, with the 10-year Treasury yield now 24 basis points higher since last Wednesday. The latest back-up in yields has been largely driven by the reaction to last Wednesday's FOMC meeting, with the Federal Reserve signaling they are getting closer to tapering their asset purchasing program - a formal announcement on tapering could potentially come as soon as the November FOMC meeting. Technology and long duration growth stocks suffered the most from the latest move in yields, further evidenced by today's market leadership, with Consumer Discretionary, Communication Services and Information Technology sectors leading the index lower. Outside of the Fed, Washington, D.C., will be in focus this week with the upcoming federal funding deadline on Friday.
- Ten of the 11 S&P 500 sectors were lower on the session, with Energy (+0.5%) and Real Estate (-0.6%) outperforming the broader market, while Communication Services (-2.8%) and Information Technology (-3.0%) lagged.
- Rates were higher across the curve, with the 10-year Treasury yield at 1.54% as of the 4 p.m. equity market close. Gold moved nearly 1% lower on the day while WTI oil was also lower, just below $75 per barrel. The US dollar was modestly stronger on the trading session, as measured by the US Dollar Index.
Catalysts for Market Move
The S&P 500 had it largest daily loss since May 12 on Tuesday, falling 2.0%. Similar to last week, early week volatility has hit US equities, with the index now lower on both Monday and Tuesday; the index is now trading 4.1% below its early September all-time high. The catalyst for today's move lower seemed to be caused by the recent move in bond yields, with the 10-year Treasury yield now trading at 1.54%, the highest level since June. Higher nominal Treasury yields have also pushed real yields back above -1%, which has negatively affected the growth and mega cap tech parts of the equity market. The move in yields comes after last week's FOMC meeting on Wednesday, where the Fed signaled that the tapering of its large scale asset purchasing program could start as early as the next FOMC meeting in November. While markets initially took the tapering announcement as a positive as the economy and labor markets continue to recover, the speed with which Treasury yields have rallied the past few trading days has put pressure on overall equity valuations, particularly in the growth segment of markets. The S&P 500 Energy sector was the only sector that was positive on Tuesday, gaining 0.5%. Investor focus will shift to Washington, D.C., this week with a possible government shutdown looming if a continuing resolution is not passed by Friday. In economic data, ISM PMIs and personal income are also set to report on Friday, which will be watched by investors.
The Global Investment Committee’s Outlook
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.