The 1% Move Report

Wealth Management — December 15, 2021

• US stocks rallied on Wednesday as the S&P 500 gained 1.6% to close at 4,710. With the rally, the index is now up 25.4% year to date.  
• The Federal Reserve was the main focus for markets today as investors looked for clarity on the path forward for monetary policy. The December FOMC meeting came after several weeks of volatility that began with Fed Chair Powell suggesting to Congress that removal of accommodation could be accelerated. This hawkish pivot was confirmed, as the Fed committed to $30 billion of tapering per month and the dot plot indicated as many as 3 hikes in 2022. While equities traded lower to start the day, these losses quickly reversed after the 2pm FOMC statement as the Fed delivered an outcome that was largely in-line with consensus expectations. With the S&P 500 down 1.7% week-to-date after Tuesday's session, investors had positioned defensively into today’s meeting, setting the stage for a potential relief rally. Notably, the Fed indicated that it would continue to manage policy in-line with economic data and suggested that the removal of policy will remain gradual. With this risk event out of the way, equities gained, led by Tech stocks which reversed recent underperformance as the Nasdaq 100 rose more than 2%.
• Ten of the 11 S&P 500 sectors were higher on the session, with Information Technology (+2.8%) and Health Care (+2.1%) outperforming the broader market, while Materials (+0.3%) and Energy (-0.4%) lagged.
• Rates were higher across the curve, with the 10-year Treasury yield rising to 1.46% as of the 4 p.m. equity market close. Gold was modestly higher on the day while WTI was also higher at nearly $72 per barrel. The US dollar was modestly weaker on the trading session, as measured by the US Dollar Index.

Equity markets traded sharply higher on Wednesday as the S&P 500 gained 1.6%. The Federal Reserve was front and center for financial markets on Wednesday, as investors looked for clarity on a potential hawkish pivot in monetary policy. US stocks had traded mostly lower in the early part of the trading session, but reversed losses after the FOMC statement, which was largely in-line with consensus expectations. Notably, the Fed committed to doubling its pace of asset purchase tapering from $15 billion to $30 billion a month and the median Fed dot plot also showed 3 rate hikes in 2022 versus none previously. In response to the shift in policy outlook, Fed Chair Powell highlighted higher inflation data, continued labor market recovery, and strong economic growth. Ten of the 11 S&P 500 sectors were higher during the session, with Tech stocks driving market gains, as the S&P 500 Information Technology sector gained nearly 3%. Outside of focus on the Fed, markets continue to monitor developments with the new Omicron variant that has led to a recent uptick in COVID-19 cases. However, initial data suggest that booster shots provide reasonable protection, particularly against severe outcomes, lowering the risk of broad lockdowns. To end the week, economic data to watch include Thursday's housing starts and weekly jobless claims, and Friday's Markit PMIs.

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 17US dollar against a subset of the broad index currencies that circulate widely outside the US.