The 1% Move Report

Wealth Management — June 18, 2021

• US stocks traded lower on Friday as the S&P 500 fell 1.3% to close at 4,166. With the decline, the index is now up 10.9% year to date.   
• After nearly a month without a 1% move on the S&P 500, US equities fell on Friday as markets continue to digest commentary from this week's FOMC meeting. The overall tone of the meeting was more hawkish than expected with the Fed dot plot suggesting two rate hikes by the end of 2023. Treasury yield volatility spiked following the meeting, with the 10-year yield falling below 1.5% while the front end of the curve has risen to the highest levels since March 2020. Growth-style equities relatively outperformed on the move lower in yields while cyclicals have lagged. The dollar has strengthened notably since the FOMC meeting while commodities have weakened broadly. 
• All 11 S&P 500 sectors were lower on the session, with Consumer Discretionary (-0.5%) and Technology (-0.9%) outperforming the broader market, while Utilities (-2.6%) and Energy (-2.9%) lagged. 
• Rates were mixed across the curve, with the 10-year Treasury yield at 1.44% as of the 4 p.m. equity market close. Gold was 0.5% lower on the day while WTI oil closed higher to $72 per barrel. The US dollar was modestly higher on the trading session, as measured by the US Dollar Index.

The S&P 500 fell 1.3% on Friday as investors continue to digest what the latest Fed policy meeting could mean for markets ahead. Equity markets opened to broad weakness on Friday following morning comments from a Fed official and remained lower into the equity market close. The theme of the week focused on Wednesday's FOMC meeting, which carried a more hawkish tone than the market expected. The Fed dot plot, a tool for guiding markets on forward policy changes, moved forward expectations for two rate hikes to occur in 2023 and took some investors by surprise. With potential policy tightening coming sooner than expected, Treasury yields fell lower, to below 1.5%, and the curve flattened overall. Equities saw broad weakness with all 11 S&P 500 sectors ending in the red while small caps (Russell 2000 Index) fell over 2% on the day. With the move lower in yields and pullback in inflation expectations, growth-style equities were the relative outperformers while cyclicals such as Energy and Financials underperformed. Turning to global markets, the US Dollar (DXY Index) appreciated nearly 2% versus a basket of global currencies on the week while broad commodities fell over 4%. Looking ahead, markets will likely continue to focus on economic data and projected Fed policy actions. New readings on Markit PMIs, durable goods, and PCE inflation will be closely watched for the latest readings on the US economy. 

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 rollout of 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 the year ahead support our base case June 2022 target of 4,225 for the S&P 500 and our bull case of 4,450. Another round of fiscal stimulus, continuing Fed accommodation, and swelling pent-up demand for consumer services, may also support economic growth to 7%-8% real GDP, with inflation rebounding to more than 2%, a scenario that should support 24% year-over-year gains. However, optimal navigation of this new business cycle will require care as Treasury rates appear 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 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.