The 1% Move Report

Wealth Management — November 29, 2021

• US stocks rallied on Monday as the S&P 500 rose 1.3% to close at 4,655. With the rally, the index is now up 23.9% year to date. 
• Equity markets rebounded to start the week, with the S&P 500 partially recovering Friday's losses as markets continue to digest potential implications of the recently identified COVID-19 variant, Omicron. While both equities and rates reversed higher on Monday, concerns over this new variant are clearly weighing on financial markets, with 10-year Treasury yields and crude oil prices still well below their pre-Thanksgiving holiday levels, while market pricing of equity volatility remains high. In addition to ongoing virus developments, expect markets to focus on economic data this week with the ISM Manufacturing PMI release on Wednesday and the November jobs report on Friday. 
• All 11 S&P 500 sectors were higher on the session, with Information Technology (+2.6%) and Consumer Discretionary (+1.6%) outperforming the broader market, while Energy (+0.6%) and Materials (+0.5%) lagged. 
• Rates were higher across the curve, with the 10-year Treasury yield to 1.51% as of the 4 p.m. equity market close. Gold was 1% lower on the day while WTI oil was higher to nearly $70 per barrel. The US dollar was modestly stronger on the trading session, as measured by the US Dollar Index.

Equity markets partially rebounded from Friday's decline, as the S&P 500 rallied 1.3% on Monday. There was no clear catalyst for the rally, although the "buy the dip" mentality that has been present for much of 2021 appeared to be at hand Monday, just one session after the major averages posted their sharpest decline in months. While Friday saw risk-off trading across asset classes as markets digested the potential impact of a new COVID-19 variant, which has now been named Omicron, Monday saw a partial reversal with rates, equities and commodities all rallying modestly on the session. That said, clearly variant concerns are still impacting financial markets as 10-year Treasury yields remain ~15 basis points below their pre-Thanksgiving levels, while equity market volatility remains elevated, as measured by the CBOE Volatility Index (VIX), which continues to trade well above 20. Cyclicals and travel-related stocks, which were the hardest hit in Friday's sell-off, were also laggards again on Monday, while technology and internet-related stocks led the market higher. As it relates to Omicron, MS&Co. biotechnology analyst Matthew Harrison believes this new variant highlights the continued risk of variants in an evolving pandemic. Looking forward, Harrison believes markets will be assessing the transmissibility and severity of Omicron, as well as its resistance to existing vaccines, in gauging potential market and economic impacts; while current data is limited, Harrison believes we should have a better understanding on all these fronts over the next 1-2 weeks. Outside of ongoing developments with the virus, expect markets to focus on economic data this week, with the ISM Manufacturing PMI 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.