The 1% Move Report

Wealth Management — December 7, 2021

• US stocks rallied on Tuesday as the S&P 500 gained 2.1% to close at 4,687. With the rally, the index is now up 24.8% year to date. 
• US equities traded higher for the second day in a row as markets look to recover following back-to-back weeks of declines. US stocks opened sharply higher Tuesday morning and rallied throughout most of the session with gains led by growth-oriented technology stocks that had been recent laggards; the NASDAQ 100 ended Tuesday more than 3% higher. While there has been no obvious catalyst for this week's reversal, it would appear sentiment around Omicron is improving and may be driving markets higher. To that end, while too early to draw any conclusions, early data out of South Africa seems to suggest it is possible that while Omicron may be more transmissible than prior iterations of the virus, it may not lead to as severe outcomes; expect more conclusive data surrounding the risks posed by Omicron in the coming days and weeks.  
• All 11 S&P 500 sectors were higher on the session, with Information Technology (+3.5%) and Consumer Discretionary (+2.4%) outperforming the broader market, while Utilities (+0.8%) and Consumer Staples (+0.2%) lagged.
• Rates were higher across the curve, with the 10-year Treasury yield rising to 1.45% 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 Tuesday as the S&P 500 gained 2.1%, the largest daily gain since March 2021. Combined with the prior day's rally, the index is now up more than 3% on the week and back to within 1% of the all-time closing high struck on November 18. While there is no definitive catalyst to point to for this week's rally, it would appear sentiment around Omicron is improving, as markets appear to be interpreting initial data out of South Africa with regard to the severity of the virus as encouraging. While the latest commentary out of health officials in the US and globally offers hope that Omicron may not be as severe as perhaps thought two weeks ago, MS & Co. biotechnology analyst Matthew Harrison emphasizes that it is still too early to assess Omicron's severity and transmissibility and that we will have a clearer picture in the coming days and weeks. Market breadth was once again strong on Tuesday with more than 85% of index constituents rallying and all 11 sectors finishing higher on the session. Technology shares led the market higher, with the S&P 500 Information Technology sector up 3.5% on the session. Oil prices also rallied sharply on the session, and Treasury yields were higher across the curve. Looking ahead, expect markets to focus on continued Omicron developments, as well as inflation data ahead of next week's FOMC meeting with the November CPI release on Friday.

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.