The 1% Move Report

Wealth Management — February 2, 2021

• US stocks traded higher on Tuesday as the S&P 500 rose 1.4% to close at 3,826. With the rally, the index has now rallied 1.9% year to date.   
• US equities further recovered on Tuesday with the S&P 500 gaining 1.4%. In combination with Monday's gains, the index has now rallied 3% this week, nearly reversing last week's losses. After a spike in volatility that seemed related to the surge in highly shorted stocks weighed on markets last week, this week volatility has subsided as equities recovered. Sentiment may also have improved with continued talks in Washington around a potential stimulus package and positive COVID-19 vaccine trial results from two major pharmaceutical companies. Market focus continues on Q4 2020 earnings season and upcoming economic reports with January labor market data due to be released this week. 
• All 11 S&P 500 sectors finished the session higher, with Financials (+2.5%) and Industrials (+2.2%) outperforming the broader market, while Real Estate (+0.4%) and Health Care (+0.3%) lagged the broader market. 
• Rates moved higher across the curve, with the 10-year Treasury yield rising 2 basis points and closing at 1.10% as of the 4 p.m. equity market close. Gold fell 1.3%, while WTI oil was higher, at nearly $55 per barrel. The US dollar was flat in the trading session, as measured by the US Dollar Index.

US stocks rose on Tuesday as the S&P 500 gained 1.4%, as markets continue to recover from last week’s more than 3% sell-off, which marked the worst week for the index in more than three months. Tuesday’s rally builds on Monday's momentum as sentiment has continued to improve after volatility struck markets last week, with the S&P 500 now 3% higher week to date. Optimism surrounding a potential fiscal package in Washington may be growing, as Republican and Democratic leaders continue to negotiate over a potential deal; it remans to be seen whether a bi-partisan compromise will be reached, or if Democrats instead look to pursue a package through budget reconciliation, which would require just 50 votes in the Senate plus the Vice President. Regardless of process, it would appear markets are expecting more stimulus in the weeks or months ahead. Positive news on the pandemic front may also be lifting markets this week, with encouraging results from two new vaccine candidates reported in recent days. Further, this week the US crossed a key milestone in that more individuals were vaccinated in a single day than those who had confirmed COVID cases. All 11 sectors moved higher on Tuesday with outperformance from cyclical sectors. Rates also moved higher across the curve, and in commodity markets, oil rallied while gold declined. Looking ahead, Q4 2020 earnings season continues with a number of large internet-related companies due to report results after the bell on Tuesday. Economic data will also be in focus this week, with the January non-farm payrolls report on Friday capping off a busy week for economic releases.

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 could support another 5%-10% gain to 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 5%-6% 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.

VIX: This is a trademarked ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 Index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market’s expectation of stock market volatility over the next 30-day period.