The 1% Move Report

Wealth Management — January 4, 2021

• US stocks traded lower Monday as the S&P 500 fell 1.5% to close at 3,701.  
• While equities pointed higher Monday morning, early gains gave way to losses as stocks fell sharply throughout the session. While there was no single catalyst to point to for Monday's slide, market focus remains on the upcoming run-off elections in Georgia, with the balance of power in the Senate hanging on Tuesday's vote; we expect markets to react as results are reported in the coming days. COVID-19 also remains in focus, as a new, potentially more transmissible strain of the virus has swept across the United Kingdom in recent days, driving Prime Minister, Boris Johnson, to announce a nationwide lockdown Monday evening. While these concerns likely played a part in Monday's sell-off, markets may have been due for some consolidation regardless of the news flow given the extent of recent gains. 
• Ten of the 11 S&P 500 sectors were lower, with Energy (+0.1%) and Health Care (-0.5%) outperforming the broader market, while Utilities (-2.6%) and Real Estate (-3.3%) lagged the broader market. 
• Rates were mixed across the curve, with the 10-year Treasury yield falling to 0.91% as of the 4 p.m. equity market close. Gold was 2.3% higher, while WTI oil moved lower to nearly $47 per barrel. The US dollar weakened modestly in the trading session, as measured by the US Dollar Index.

US stocks traded lower on Monday as the S&P 500 lost 1.5%.  After the S&P 500 gained 16.3% for the year 2020 and closed at a new all-time high to finish the year, equities opened 2021 trading with their biggest daily loss in over 2 months. While there was no single catalyst to explain Monday's reversal, several headlines may have weighed on sentiment. First, reports of a new, potentially more transmissible strain of COVID-19 that has swept across the United Kingdom in recent days may be becoming more concerning to markets as the new strain has now surfaced in the United States and several other countries. Further, late Monday afternoon, UK Prime Minister, Boris Johnson, announced a new nationwide lockdown aimed at reducing the stress COVID-19 is putting on the United Kingdom's healthcare system, potentially sparking concern that broad lockdowns, now in place across much of Europe, may be implemented in other regions across the world. While November and December saw rallies as markets welcomed positive vaccine developments, Monday's sell-off serves as a reminder that markets will still have to weigh the near-term risks posed by the pandemic against some of the more positive intermediate-term expectations on vaccines and re-opening. Outside of COVID-19, political uncertainty remains high on the eve of the Georgia run-off elections, with the balance of power in the US Senate resting on the outcome of Tuesday's two senatorial contests. We expect markets to react as results start coming in Tuesday evening. Looking ahead, outside of the political calendar, a busy week for economic data continues with Tuesday's manufacturing PMI report and Friday's non-farm payrolls report.

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.