The 1% Move Report

Wealth Management — December 2, 2021

• US stocks traded higher on Thursday as the S&P 500 gained 1.4% to close at 4,577. With the rally, the index is now up 21.9% year to date. 
• The back and forth trading action in US equity markets continues, with the major averages rebounding on Thursday following back-to-back declines in the prior two sessions. The S&P 500 has now had five straight sessions of greater than 1% moves, the longest such streak in more than a year. Volatility has picked up as markets grapple with the newfound risks related to the Omicron variant as well as speculation around a potential hawkish pivot from the Federal Reserve. While cyclical sectors have largely lagged recently, on Thursday cyclicals and travel-oriented equities led the market higher. Treasury bonds also sold off across the curve as yields moved higher. Looking ahead, markets will focus on continued Omicron developments and economic data will be back in focus with Friday's November non-farm payrolls release. 
• All 11 S&P 500 sectors were higher on the session, with Industrials (+2.9%) and Energy (+2.9%) outperforming the broader market, while Consumer Staples (+0.8%) and Health Care (+0.4%) lagged.
• Rates were higher across the curve, with the 10-year Treasury yield rising to 1.43% as of the 4 p.m. equity market close. Gold was modestly lower on the day while WTI was higher at $67 per barrel. The US Dollar was modestly stronger on the trading session, as measured by the US Dollar index.

Equity markets rebounded on Thursday as the S&P 500 gained 1.4%. While on Wednesday markets gave up initial gains to close sharply lower, Thursday equities opened little changed but rallied throughout most of the day to finish near session highs. With Thursday's move, the S&P 500 has now recorded a 1% or greater move in five straight sessions, the longest such streak since November 2020. 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. While cyclicals have come under outsized pressure in the past week as volatility has picked up amid Omicron concerns, on Thursday these recent laggards reversed sharply higher, with Industrials, Energy and Financials the top three sector performers on the day. Looking ahead, expect markets to watch Friday's November non-farm payrolls release; consensus expectations call for the US to have added 550,000 jobs last month, with the unemployment rate falling to 4.5%.

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.