The 1% Move Report

Wealth Management — May 14, 2021

• US stocks traded higher on Friday as the S&P 500 rose 1.5% to close at 4,174. With the rally, the index is now up 11.1% year to date.   
• Following three straight days of losses to begin the week, US equities rebounded on both Thursday and Friday to close out the week on a high note. While the S&P 500 still finished 1.4% lower this week, the last two trading sessions were strong, with technology and growth stocks leading the bounce back after lagging Monday through Wednesday. Inflation data has been the predominant news story this week, with Wednesday's CPI number surprising to the upside on both year-over-year and month-over-month figures, pushing interest rates higher and negatively impacting growth segments of the market. While yields have moved higher on the week overall, bonds did rally on Friday, helping to drive the rebound in growth and technology shares.  
• All 11 S&P 500 sectors were higher on the session, with Energy (+3.2%) and Information Technology (+2.1%) outperforming the broader market, while Utilities (+0.4%) and Health Care (+0.4%) lagged. 
• Rates were lower across the curve, with the 10-year Treasury yield at 1.63% as of the 4 p.m. equity market close. Gold was 0.8% higher on the day while WTI oil closed higher at just above $65 per barrel. The US dollar was modestly weaker on the trading session, as measured by the US Dollar Index.

US equities moved higher for the second straight session on Friday, with the S&P 500 gaining 1.5%. Rallies Thursday and Friday to cap off the week did not save the S&P 500 from suffering weekly losses, however, as the index still fell 1.4%. There was no clear catalyst for the rebound the past two days, but a comeback in growth and technology stocks, which were the largest underperformers in the first half of the week, helped calm markets into the weekend. The main headlines this week have come from a key US pipeline closing and consequently reopening affecting oil and gas prices, as well as inflation data. While companies during the Q1 earnings seasons spoke of inflationary pressures in their respective businesses and supply chains, with some even choosing to raise prices of products, the recent hard data also pointed to a higher inflationary backdrop. While it is just one data point to reference and can be subject to base effects, the higher-than-expected CPI data on Wednesday pushed Treasury yields higher and equities lower. The growth-style part of the equity market was especially impacted as rates moved higher Wednesday, but both Treasury bonds and stock markets have calmed since then. When all is said and done, however, the NASDAQ 100 still finished down 2.4% on the week, the worst weekly return since the end of February of this year. Looking ahead, next week will have multiple housing data readings as well as Markit PMIs. 

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 2021 support our base case year-end target of 3,900 for the S&P 500 and our bull case of 4,175. 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 24% 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 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.