The 1% Move Report

Wealth Management — December 1, 2021

• US stocks traded lower on Wednesday as the S&P 500 declined 1.2% to close at 4,513. With the sell-off, the index is now up 20.2% year to date. 
• While it was shaping up to be a positive day for equities, with the S&P 500 up as much as 1.9% intraday this morning, a sharp reversal throughout the afternoon saw the major averages close at their lows for the session. As has been the case in recent days, concerns over the Omicron variant and speculation around Federal Reserve tightening weighed on markets Wednesday. On the former, news during the session that case counts had nearly doubled overnight in South Africa appeared to dampen sentiment this morning and losses accelerated in the afternoon following an announcement from the US Center for Disease Control (CDC) that the first confirmed case of the Omicron variant had been identified in California. In a departure from recent market leadership, technology and internet-related stocks underperformed on the session, with the NASDAQ 100 falling 1.6%. Looking ahead, markets will continue to focus on Omicron developments, as well as on economic data with the November jobs report due out Friday.  
• Ten of the 11 S&P 500 sectors were lower on the session, with Utilities (+0.2%) and Health Care (-0.2%) outperforming the broader market, while Consumer Discretionary (-1.9%) and Communication Services (-2.0%) lagged.
• Rates were lower across the curve, with the 10-year Treasury yield falling to 1.42% as of the 4 p.m. equity market close. Gold was modestly higher on the day while WTI oil reversed early gains to close lower at $65 per barrel. The US Dollar was modestly stronger on the trading session, as measured by the US Dollar index

Equity markets sold-off again on Wednesday, as the S&P 500 fell 1.2%. With Wednesday's move, the S&P 500 has now fallen nearly 5% from the intra-day high struck last week. Volatility has picked up, with the index now recording a greater than 1% closing move for four straight sessions and the CBOE Volatility Index (VIX) spiking above 30 for the first time in nine months. Markets have focused on two primary catalysts in recent sessions - 1) the newly discovered Omicron variant which appears to be driving a surge in new COVID-19 cases across southern Africa with more isolated cases popping up around the world and 2) a hawkish pivot from the Federal Reserve this week with Chair Powell suggesting the central bank could accelerate its tapering of bond purchases in the months ahead given recent upside surprises in inflation data. With regards to Omicron, it will likely take ~1-2 weeks to get a better understanding of the risks posed by this new variant as more data is needed to gauge transmissibility, severity and the variant's ability to elude existing vaccinations. That said, even before the variant was discovered case counts had been increasing across much of the world and a seasonal pick-up in infections was likely already expected. While Omicron and a hawkish Fed pivot may be the catalyst for this week's slide, elevated equity valuations left little room for negative surprises and in reality the market may have been due for some consolidation given strong year-to-date returns; to that point, even with the recent sell-off, the S&P 500 remains up more than 20% on the year-to-date. Looking ahead, expect markets to focus on Omicron developments, as well as economic data with Friday's November nonfarm payrolls release. 

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.