The 1% Move Report

Wealth Management — March 9, 2021

• US stocks rallied on Tuesday as the S&P 500 gained 1.4% to close at 3,875. With the rally, the index is now up 3.2% year to date.   
• Tuesday's move higher in equities follows a late-afternoon sell-off into the close on Monday, which resulted in the S&P 500 falling for the fourth time out of the prior five sessions. While in recent sessions a sharp rotation out of growth stocks into value stocks alongside a move higher in long-end bond yields reinjected volatility into markets, Tuesday's action followed a different script-10-year Treasury yields moved lower while mega-cap technology stocks led the market higher. Underscoring this reversal, the NASDAQ 100, which had closed in negative 10%+ correction territory yesterday, recorded its strongest session in four months on Tuesday, rallying 4.0%. Outside of technology stocks, however, breadth was lacking on Tuesday; three sectors finished the day in the red, and only 49% of S&P 500 members rallied on the session. 
• Seven of the 11 S&P 500 sectors finished the session higher, with Consumer Discretionary (+3.8%) and Information Technology (+3.4%) outperforming the broader market, while Financials (-0.9%) and Energy (-1.9%) lagged. 
• Rates were lower across the curve, with the 10-year Treasury falling to 1.54% as of the 4 p.m. equity market close. Gold rose 2.0%, while WTI oil was lower, at nearly $64 per barrel. The US dollar weakened modestly in the trading session, as measured by the US Dollar Index.

US equities rallied on Tuesday as the S&P 500 traded 1.4% higher. While equity markets finished the day higher, a late-day sell-off took hold again, with the major averages closing well off their intra-session highs. While recent sessions have been characterized by higher long-end bond yields driving a rotation out of mega-cap technology stocks into value and cyclicals, Tuesday's market action was the opposite-10-year bond yields retraced lower to 1.54%, while gains were concentrated in many of the recent mega-cap growth laggards. While the NASDAQ 100 rallied more than 4% on the session, broad market breadth was notably weak-only half of S&P 500 members closed higher on the day, and the equal-weighted S&P 500 Index was flat. While this weak participation may damper some of the enthusiasm around Tuesday's rally, it should be shown in context-the equal-weighted S&P 500 Index traded to a new all-time high on Monday, while the NASDAQ 100 index closed down more than 10% from its high last month. In other words, some of the recent rotation may have been stretched, and Tuesday's reversal may simply be a reflection of some market internals normalizing after extreme performance. There were few new headlines or economic data points driving Tuesday's action, though looking ahead, we expect markets to focus on the latest COVID-19 stimulus package, expected to be signed into law this week, as well as next week's March FOMC meeting. 

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 support our base case year-end target of 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 7%-8% 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.