The 1% Move Report

Wealth Management — November 26, 2021

• US stocks traded sharply lower on Friday as the S&P 500 declined 2.3% to close at 4,595. With the sell-off, the index is now up 22.3% year to date. 
• Equity markets re-opened following the Thanksgiving holiday to a sharp sell-off as concerns over a new COVID-19 variant initially discovered in several southern African nations appeared to drive widespread de-risking across global markets. The S&P 500 recorded its first greater-than-1% sell-off in nearly two months with broad-based selling as all 11 sectors and over 90% of index constituents ended the day in the red. Small caps fared even worse, with the Russell 2000 recording its worst day since February of 2021. 10-year Treasuries saw their strongest single-day rally of the year, while commodities slid with crude oil prices down more than 10% during the session. Given it was a holiday-shortened session, with equity markets closing at 1 p.m. Eastern on Friday, volatility may have been amplified during the session.
• All 11 S&P 500 sectors were lower on the session, with Health Care (-0.5%) and Consumer Staples (-1.4%) outperforming the broader market, while Financials (-3.3%) and Energy (-4.0%) lagged.
• Rates were sharply lower across the curve, with the 10-year Treasury yield down to 1.49% as of the 1 p.m. equity market close. Gold was modestly lower on the day while WTI oil was sharply lower, down to $69 per barrel. The US dollar was modestly weaker on the trading session, as measured by the US Dollar Index.

There was no holiday cheer on Wall Street this Friday, as equity markets sold off sharply in a holiday-shortened session that saw the S&P 500 fall 2.3%, the first greater-than-1% sell-off for the index since early October. Concerns over a new COVID-19 variant initially discovered in several southern African nations appeared to drive widespread de-risking across global markets to end the week. This new variant, referred to as B.1.1.529, was first identified in Botswana and has driven an uptick in cases across several southern African regions. In his note Friday morning, Initial Thoughts on B.1.1.529 Or 'Nu' Variant, MS & Co. Research Biotechnology Analyst Matthew Harrison urges caution in gauging the level of concern around this variant at this point as information is limited. Harrison believes we should have a better understanding of the potential transmissibility, severity and vaccine efficacy in combatting the variant within ~2 weeks. While information is still limited, markets adopted a decidedly risk-off tone on Friday, as Treasuries rallied and equities sold off sharply. Travel-related sectors were particularly hard hit, presumably on concerns that travel restrictions could be implemented - to this end, headlines crossed during the session that EU members would be placing a travel ban on seven countries in southern Africa and that the US government may be considering a similar policy. Underscoring the uncertainty, the CBOE Volatility Index (VIX) surged nearly 50% on Friday, with the front-month VIX contract reaching its highest level in ten weeks. Next week, expect focus to remain on the developing updates around this new variant, as well as on economic data as December kicks off with the ISM survey release on Wednesday and the November jobs report on Friday.

Record stimulus and a stronger-than-expected US reopening have accelerated the shift from early to mid-cycle, lifting equity markets to new all-time highs. The continued economic momentum in global trade, manufacturing, corporate earnings, and housing have set the tone for strong US economic growth; however, this backdrop has been increasingly priced into markets. Index-level valuations peaked at more than 22x forward earnings and history suggests valuation multiples will trend lower as earnings improve, supporting our base case year-end 2022 target of 4,400 for the S&P 500 and our bull case of 5,000. With higher expectations and a move into mid-cycle, investors should upgrade their portfolios by dialing back extreme positioning and allocating more exposure toward high-quality cyclicals and growth at a reasonable price. With a potential long-term infrastructure bill in progress and the unleashing of pent-up demand for services-related spending, the US faces a potential favorable outlook for economic growth and inflation possibly rebounding to a 2.5%-3% range over the coming years. However, optimal navigation of this new business cycle will require care as Treasury rates appear likely to move higher toward 2% in the next year, creating a headwind for long-duration assets. With regard to stocks, our preferences for quality and valuation support warrant allocating to international stocks with less expensive valuations, 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 as the rolling global reopening continues. 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 high yield credit, preferreds, leveraged loans, asset-backed securities, including select mortgage-backed, and dividend-paying stocks. Real assets such as gold, infrastructure, and real estate present an attractive opportunity as a portfolio ballast for income generation and as an inflation hedge.

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 17US dollar against a subset of the broad index currencies that circulate widely outside the US.