The 1% Move Report

Wealth Management — April 5, 2021

• US stocks moved higher on Monday as the S&P 500 gained 1.4% to close at 4,078. With the rally, the index is now up 8.6% year to date.
• Equities kicked off the week on a strong note as US economic data drove equities higher for the third day in a row with the S&P 500 firmly breaking through the 4,000 mark. Momentum from last week carried over into Monday's trading as Friday's Nonfarm Payrolls report strongly beat expectations during the market holiday, potentially contributing to a strong opening on Monday. The opening move higher was then further fueled by the strongest ISM Services reading since the survey's start in 1997. Market breadth was broad on Monday with roughly 80% of the S&P 500 gaining on the day, led by growth and large cap tech stocks. The NASDAQ 100 moved 2% higher on what could be seen as a rotation back into growth stocks.
• Ten of the 11 S&P 500 sectors finished the session higher, with Consumer Discretionary (+2.3%) and Communication Services (+2.3%) outperforming the broader market, while Real Estate (+0.6%) and Energy (-2.4%) lagged.
• Rates were lower across the curve, with the 10-year Treasury yield at 1.71% as of the 4 p.m. equity market close. Gold was flat on the day while WTI oil closed sharply lower to just below $59 per barrel. The US dollar weakened modestly in the trading session, as measured by the US Dollar Index.

The S&P 500 rallied 1.4% on Monday in the third consecutive move higher for the index as momentum continues to push the index well above the 4,000 point level. Strong US economic data and last week's news around a potential infrastructure spending bill drove markets higher into the holiday weekend. This market optimism was then further supported by Friday's stronger than expected Nonfarm Payrolls report at 916,000 jobs added versus 660,000 expected - the strongest reading in seven months. With equity markets closed on Friday, this robust labor data may have contributed to Monday's higher market open and was then perpetuated by the strongest ISM Services reading since the survey began in 1997. Monday's move higher was broad in nature with roughly 80% of the S&P 500 stocks recording gains on the day while ten of the 11 sectors ended in the green. Growth and large cap tech were the relative outperformers as the recent pause in 10-year Treasury yields relieves valuation pressure on the high multiple stocks. The NASDAQ 100 ended the day 2% higher while small caps (Russell 2000 Index) lagged their large cap peers. Bucking the risk-on trend across markets, oil saw a steep selloff to just below $59 perbarrel. Looking to the week ahead, JOLTS job openings on Tuesday and release of the FOMC meeting minutes from March on Wednesday will be closely watched for fresh readings on the US economy.

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 support 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.

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.