The 1% Move Report

Wealth Management — October 5, 2021

• US stocks traded higher on Tuesday as the S&P 500 rose 1.1% to close at 4,346. With the rally, the index is now up 15.7% year to date.   
• After trading lower on Monday, stocks reversed higher on Tuesday as the S&P 500 has now alternated between 1%+ down and up moves for four straight sessions. There was no clear catalyst for Tuesday's rebound, though equity market action largely appeared to be a reversal of the prior session as technology and growth stocks bounced back to lead the market higher after sharply underperforming in the prior session. Financials were also a strong performer on the day, likely aided by the continued moved higher in rates as the 10-year Treasury yield climbed back above 1.50%. On the data front, the ISM Services PMI report came in ahead of expectations, while markets will look ahead to Wednesday's ADP private payrolls data and Friday's September jobs report from the Bureau of Labor Statistics. 
• Nine of the 11 S&P 500 sectors were higher on the session, with Financials (+1.8%) and Communication Services (+1.6%) outperforming the broader market, while Utilities (-0.2%) and Real Estate (-0.9%) lagged. 
• Rates were higher across the curve, with the 10-year Treasury yield at 1.53% as of the 4 p.m. equity market close. Gold was 0.5% lower on the day while WTI oil was sharply higher at $79 per barrel. The US dollar was modestly stronger on the trading session, as measured by the US Dollar Index. 

US equities bounced back on Tuesday, partially recovering from Monday's sell-off. With the rally, the S&P 500 has now alternated between down and up moves of more than 1% for four straight trading days, and the index now sits 4.2% below its early September all-time highs. While Monday's sell-off was driven by a rotation out of technology and growth stocks, Tuesday's reversal saw nine of the 11 S&P 500 sectors record gains in what was a broad equity rally. There appeared to be no clear reason behind today's rally outside of a rebound following Monday's sell-off, although a better-than-expected ISM Services PMI print could've contributed to optimistic sentiment, posting at 61.9 versus the consensus estimate of 59.9. The yield curve also steepened as 10-year Treasury yields moved above the 1.50% level again, closing at 1.53% as of the 4pm equity close, which helped the Financials sector outperform. WTI oil has also been gaining traction in recent sessions following agreement among OPEC+ ministers to stick to production increases as scheduled and not adjust as many had expected given recent tightness in oil markets; the commodity now trades at $79 per barrel, the highest level since 2014. Looking ahead, markets will be focused on potential news from Washington, D.C., as negotiations on the debt ceiling, infrastructure package and budget continue, as well as Friday's nonfarm payrolls report in gauging the momentum of the labor market recovery for the month of September. 

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 June 2022 target of 4,225 for the S&P 500 and our bull case of 4,450. 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, continued Fed accommodation, and the unleashing of pent-up demand for services-related spending, the US faces a potential favorable outlook for economic growth with 7%-8% real GDP this year 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.