Wealth Management — January 13, 2022
- US stocks traded lower on Thursday as the S&P 500 declined 1.4% to close at 4,659. With the sell-off, the index is down 2.3% year to date.
- After a two-day rally, stocks reversed course on Thursday to finish more than 1% lower. There was no clear catalyst for the day's decline, although outsized weakness in technology shares drove the broad indexes lower during the session; to that end, the NASDAQ 100 sold-off 2.6%. Several Federal Reserve members have provided comments in recent days about the outlook on the economy and inflation and the potential need for the Fed to commit to a tighter monetary policy framework in 2022, which could have contributed to weakness Thursday. While technology stocks were the main laggards, interest rates actually moved lower across the curve.
- Eight of the 11 S&P 500 sectors traded lower on Thursday, with Utilities (+0.5%) and Consumer Staples (+0.2%) outperforming the broader market, while Consumer Discretionary (-2.1%) and Information Technology (-2.7%) lagged.
- Rates were lower across the curve, with the 10-year Treasury yield falling to 1.69% as of the 4 p.m. equity market close. Gold was slightly lower on the day while WTI was also lower, now above $81 per barrel. The US dollar was flat on the trading session, as measured by the US Dollar Index.
Equity markets traded lower on Thursday as the S&P 500 fell 1.4%. After a two day rally, stocks reversed lower with outsized weakness in technology stocks. There was no clear catalyst for the sell off, but in recent weeks growth stocks have been volatile as markets appear to be concerned that a hawkish pivot from the Federal Reserve could put pressure on stocks trading at elevated valuations, particularly in the growth cohort. Monday, equities staged a sharp intraday rally that was led by mega cap tech, with the Nasdaq 100 erasing a more than 2% loss to close higher on the day. Tuesday and Wednesday markets continued that optimism as the broad indexes built off of Monday's intraday momentum, but some gains were given back on Thursday. There has been a number of Federal Reserve members speaking on the economy, the threat of inflation, and the Fed's need to combat higher pricing pressures with tighter monetary policy, which could've caused weakness in long duration growth stocks on Thursday. Speculation has grown following recent comments out of the Fed that the central bank could look to raise interest rates at a more aggressive pace, or consider winding down its balance sheet later this year, and this hawkish Fed pivot likely will drive more volatility in markets going forward. This week's elevated CPI reading, with year-over-year inflation coming in at 7.0%, the highest reading since 1982, likely puts further pressure on the Fed to consider tightening policy in the months ahead. With the CPI release out of the way, we expect markets to shift focus to fundamentals, with the beginning of Q421 earnings season on Friday with several large-cap banks scheduled to report.
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 year-end 2022 target of 4,400 for the S&P 500 and our bull case of 5,000. 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 and the unleashing of pent-up demand for services-related spending, the US faces a potential favorable outlook for economic growth 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 US dollar against a subset of the broad index currencies that circulate widely outside the US.