Wealth Management — September 30, 2021
- US stocks traded lower on Thursday as the S&P 500 lost 1.2% to close at 4,308. With the sell-off, the index is now up 14.7% year to date.
- US equities slid lower on Thursday as headline indexes continue to grapple with elevated Treasury yields. While Thursday was relatively quiet in terms of economic data, trading was perhaps influenced by quarter-end rebalancing with 3Q coming to a close. Trading saw a reversal in style from the front half of the week, with growth and technology stocks faring better while cyclicals were the relative laggards. With Thursday’s move, the S&P 500 index is now 5% below its early September all-time highs, which now marks the first 5% correction since November 2020. Investor focus has also shifted to Washington, D.C., where Congress passed a bill today temporarily extending government funding, averting a shutdown, and sent the resolution to the President's desk.
- All 11 S&P 500 sectors were lower on the session, with Communication Services (-0.4%) and Information Technology (-0.7%) outperforming the broader market, while Consumer Staples (-1.9%) and Industrials (-2.1%) 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 moved nearly 1.8% higher on the day while WTI oil was also slightly higher at $75 per barrel. The US dollar was modestly weaker on the trading session, as measured by the US Dollar Index.
The S&P 500 fell 1.2% on Thursday, falling for the third time this week. While stocks opened the day higher this morning, a late afternoon sell-off brought the index below 1%. With today’s losses, the 3rd quarter comes to an end with the S&P 500 gaining 0.2%, the lowest quarterly return since the 1st quarter of 2020. While there was no clear catalyst for Thursday’s move lower, recent sessions have seen less than optimistic market sentiment following last week’s Federal Reserve meeting, which signaled the potential for the central bank to begin tapering asset purchases as soon as November. Outside of the Fed, investor focus has also shifted to Washington, D.C., where Congress passed a bill today temporarily extending government funding, averting a shutdown, and sent the resolution to the President's desk. However, Congress continues to debate the $1T infrastructure spending bill and $3.5T budget reconciliation bill, which could potentially be weighing on markets. While all 11 sectors finished lower on the session, fixed income markets were relatively steady with the 10-year Treasury nearly unchanged and credit seeing only modest spread widening. To end the week, economic data set to report on Friday include fresh readings on PCE inflation and ISM manufacturing PMI.
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.