Weekly Market Guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Short-Term Summary:
The Delta variant has been a headwind for the recovery over the past couple of months, along with areas most levered to the economy. Throughout the resurgence in Covid cases, many of these more economically-sensitive areas have largely been digesting previous strength, resulting in volatility occurring beneath the surface of the market’s steady climb higher. However, cases could be peaking with the pace of new cases slowing and the transmission rate in areas like Texas and Florida dropping below 1.0. FDA approval of the Pfizer/BioNTech vaccine may also contribute to higher vaccination rates and support improving Covid trends. This potential inflection is spurring rotation back into “re-open” areas in recent days, and this is where we see the most opportunity.
The S&P 500 was able to break out to new highs after finding support near its 50-day moving average (again) last week. Importantly, the breakout came on outperformance from the “average stock” with a risk-on composition to sector returns beneath the surface. For example, some of the lagging “reopen” areas since May (Energy, Financials, Consumer Discretionary) led the move higher, while the more “defensive” areas traded lower. It is within the more economically-sensitive areas that we see the most opportunity at current levels. Also, relative strength for the equal-weight S&P 500 index was able to hold its recent lows, and we would like to see this begin to improve- as improving market participation bodes well for technical momentum.
Moreover, we remain positive on the fundamental backdrop. Q2 earnings season finished well ahead of expectations for the fifth quarter in a row, and we believe upside remains for forward estimates. Also, margin estimates have held steady at record high levels despite the ongoing pressure of supply chain shortages, as demand remains high. We continue to believe that low interest rates and enormous stimulus are supporting elevated valuations and fundamental momentum in the recovery- resulting in upside to equities. We acknowledge many items on the horizon that can impact volatility (i.e. tax/infrastructure debate, debt ceiling, tapering, tensions in the Middle East, etc.), but continue to view the fundamental and technical backdrop as supportive over the intermediate term. We also maintain our overall stance on sector allocations- that being a balanced but pro- cyclical tilt within portfolios.
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Index Definitions
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.
The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.
MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.
MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy, and banks.
Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
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