The 1% Move Report

Wealth Management — March 1, 2021

• US stocks rallied sharply on Monday as the S&P 500 rose 2.4% to close at 3,902. With the rally, the index is now up 3.9% year to date.
• After back-to-back days of losses on Thursday and Friday, equity markets bounced back sharply to begin the new week with the S&P 500 recovering almost all of last week's decline. While the move could be nothing more than markets recovering after last week's weakness on the back of sharply higher interest rates, economic data reported Monday morning may have also contributed to the shift in sentiment. The ISM manufacturing index came in two points ahead of consensus estimates, setting the tone for what will be a busy week for economic data releases that will culminate with Friday's February jobs report.
• All 11 S&P 500 sectors finished the session higher, with Information Technology (+3.2%) and Financials (+3.1%) outperforming the broader market, while Consumer Staples (+1.0%) and Real Estate (+0.2%) lagged.
• Rates were mixed across the curve, with the 10-year Treasury rising two basis points on Monday, closing at 1.42% as of the 4 p.m. equity market close, while two-year rates were slightly lower. Gold fell 0.6%, while WTI oil was also lower, at just over $60 per barrel. The US dollar strengthened modestly in the trading session, as measured by the US Dollar Index. 
  

US equities rallied Monday as the S&P 500 rose 2.4%, marking the strongest session for the index since June of last year. Monday's rally comes after last week's 2.5% decline, with two days in a row of selling to end the week. While Monday's rebound may have come as a result of investors simply buying the weakness in equity markets that accrued last week, economic data reported this morning also came in ahead of consensus estimates, which may have helped lift sentiment. The ISM Manufacturing PMI rose to 60.8 in the month of February, well above consensus estimates and the highest level for that gauge in nearly three years. The new orders component of the survey rose to 64.8 versus the consensus of 60, which should bode well for manufacturing earnings in the months ahead. Approval over the weekend of a third vaccine in the United States also may have helped lift sentiment around the 're-opening' trade on Monday, with more vaccine supply set to be made available in the coming weeks and months. Lack of significant volatility in rates on Monday also likely contributed to the equity rally. The recent sharp rise in long-end bond yields, with the 10-year Treasury yield rising 34 basis points in the month of February alone, put pressure on overall equity valuations, particularly in growth and technology stocks. While the quick move higher in rates was viewed as a short-term headwind for valuations that seemed extended, the re-pricing of yields also signals improving economic conditions and is likely a positive reflection on fundamentals. The S&P 500 Information Technology and Financials sectors were the top performers on the session, while Consumer Staples and Real Estate lagged. Markets will look ahead to jobs data throughout the week, with the ADP Employment change report out on Wednesday and February Non-farms payrolls out on Friday.

Record and unprecedented stimulus from both the Fed and Congress has unleashed a V-shaped recovery in global trade, manufacturing, goods retailing, and housing. That momentum, coupled with the resolution of the US Presidential election and much better-than-expected initial trial outcomes for COVID-19 vaccines, has lifted equity markets to new all-time highs. Although investors are correct to be concerned about index level valuations, which have reached multi-decade extremes at more than 22x forward earnings, the economic and profit dynamics in 2021 supports our base case year-end target of 3,900 for the S&P 500. Another round of fiscal stimulus, continuing Fed accommodation, and swelling pent-up demand for consumer services, may also support economic growth acceleration to 7%-8% real GDP, with inflation rebounding to more than 2%, a scenario that should support 27% year-over-year profit gains. However, optimal navigation of this burgeoning new business cycle will require care as Treasury rates are likely to move higher, creating a headwind for long-duration assets. In stocks, our preferences remain focused on quality and valuation support, attributes that remain in small caps, international stocks 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, supporting the case for emerging markets and commodities. 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 corporate credit (IG and HY), preferreds, leveraged loans, asset-backed securities, including select mortgage-backed, and dividend-paying stocks. Capital preservation and portfolio hedging from equity volatility may be achieved with a combination of cash and ultra-short duration instruments, and absolute return hedge funds. Real assets like gold, infrastructure and real estate for inflation support should be bought opportunistically.

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.

ISM Manufacturing PMI: Monitors employment, production inventories, new orders and supplier deliveries.

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.