The 1% Move Report

Wealth Management — September 23, 2021

• US stocks traded higher on Thursday as the S&P 500 gained 1.2% to close at 4,449. With the rally, the index is now up 18.5% year to date.   
• After a rocky start to the week, US markets have rebounded with Thursday's rally bringing the S&P 500 back into positive territory for the week. The market was led by cyclicals for a second straight day, with Energy and Financials the two strongest sectors. Unlike the day prior, however, Treasuries sold off sharply on Thursday as the 10-year Treasury yield crossed above 1.4% for the first time since July. While Thursday's news flow was relatively light, market action may have been driven, in part, by continued reaction to Wednesday's FOMC announcement, where the Federal Reserve signaled it was getting closer to tapering its asset purchase program and that a formal announcement on tapering could come as soon as November. With the Fed out of the way, market focus now shifts towards Congress, as negotiations continue over the infrastructure bill, the 2022 budget and the debt ceiling.  
• Nine of the 11 S&P 500 sectors were higher on the session, with Energy (+3.4%) and Financials (+2.5%) outperforming the broader market, while Utilities (-0.5%) and Real Estate (-0.5%) lagged. 
• Rates were higher across the curve, with the 10-year Treasury yield at 1.42% as of the 4 p.m. equity market close. Gold moved 1.2% lower on the day while WTI oil was higher to $73 per barrel. The US dollar was weaker on the trading session, as measured by the US Dollar Index. 

US markets shook off early week volatility with the S&P 500 posting back-to-back rallies and gaining over 2% during the previous two sessions. With the rally, the S&P 500 is now positive on the week and on track to finish in the green after posting consecutive weekly declines for the first time since May. While there appeared to be no clear catalyst for Thursday's rally, it is likely market action was in part driven by continued reaction to Wednesday's FOMC announcement. The September FOMC meeting concluded with the Federal Reserve strongly hinting that it was preparing to taper its asset purchase program, with Fed Chair Powell suggesting a formal announcement on tapering could come as soon as the committee's next meeting in November. The Fed Chair went on to suggest that the bank's asset purchase program could be fully wound down by the middle of next year, and several Fed governors' projections point to the central bank hiking its policy rate in 2022. While the Treasury market reacted little to the announcement Wednesday afternoon, Treasuries sold off sharply on Thursday as the 10-year Treasury yield climbed above 1.40% for the first time since July. With the move higher in yields, cyclical equities fared well as Energy and Financial stocks led the market higher. Looking ahead, next week will see the conclusion of the third quarter on Thursday, and next week's data calendar includes durable goods and consumer confidence readings. Markets are also likely to continue to monitor developments in Washington, D.C., as Congress continues to negotiate over the 2022 budget and navigate the debt ceiling.

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.