The 1% Move Report

Wealth Management — January 20, 2021

•  US stocks traded higher Wednesday as the S&P 500 rose 1.4% to close at 3,852. With the rally, the index is now up 2.6% year to date.   
• US equities moved higher for the second day in a row as all three of the major US stock averages closed at new all-time highs. There was no clear catalyst for the move higher, but there has recently been optimism that more fiscal stimulus could be coming as the new administration takes control in Washington. Technology and Internet-related stocks were notably strong on Wednesday, as better-than-expected results from a large video-streaming company lifted sentiment across mega-cap tech. Looking ahead, fourth quarter earnings season and a slew of economic data releases will be in focus the rest of the week. 
• Ten of the 11 S&P 500 sectors were higher, with Communication Services (+3.6%) and Consumer Discretionary (+2.3%) outperforming the broader market, while Consumer Staples (+0.3%) and Financials (-0.5%) lagged the broader market. 
• Rates were slightly lower across the curve, with the 10-year Treasury yield falling to 1.08% as of the 4 p.m. equity market close. Gold was 1.6% higher, while WTI oil also moved higher to over $53 per barrel. The US dollar weakened modestly in the trading session, as measured by the US Dollar Index.

US stocks rose 1.4% on Wednesday, as the S&P 500 traded to a new all-time high, closing at 3,852. There was no single catalyst for the rally, but a number of factors potentially contributed to the day's gains. Optimism around more potential stimulus abounds as the new administration took control of the White House with Wednesday's Presidential Inauguration. In remarks Tuesday, the incoming Treasury secretary reiterated the need for another large-scale relief package to sustain the economic recovery and markets may be looking forward to what more stimulus, if enacted, could mean for near-term growth. Outside of politics, fourth quarter earnings season has begun and strong results from a large video-streaming company overnight appeared to catalyze a sharp rally in mega-cap technology stocks. While the S&P 500 ended up more than 1.5%, breadth on the day was mixed with fewer than two-thirds of index constituents participating in the rally. Cyclical sectors and small caps lagged on the day, while Treasury yields moved slightly lower across the curve. Looking ahead, the remainder of the week will see a host of economic data with several housing-related reports, weekly jobless claims and the Markit PMI releases. Fourth quarter earnings season also picks up with next week marking the busiest week of earnings releases for S&P 500 companies.

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.