Weekly Market Guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
Short-Term Summary:
Volatility has continued with now 11 of the 18 trading days since Thanksgiving (when the Omicron news broke) posting a greater than 1% move in either direction. After closing just below its 50-day moving average on Monday, the S&P 500 bounced back on very strong 85% advancing volume yesterday. Leadership was driven by Energy, Technology, Consumer Discretionary, Financials, and Industrials- all of which were up over 2% on the day. Conversely, the more defensive Utilities and Consumer Staples sectors, who had been gaining relative strength in recent weeks, were down on the day. In fact, the equally-weighted Consumer Discretionary sector had its strongest day of outperformance vs the Consumer Staples in over a year. Internal strength following volatility, particularly from technical support, bodes well for overall trends.
The internal market improvement yesterday also lines up with some optimism over the Omicron variant, in which indications continue to suggest a very transmissible but less severe disease (so far). New cases in South Africa appear to be rolling over roughly one month from the surge’s onset. Hospitalizations are rising, but not to the degree of previous strains; and deaths have stayed relatively low for now. We want to at least be mindful of the possibility that Covid may be transitioning toward an endemic (something we live with like the flu) rather than a pandemic. We are hopeful that the global reopening can progress over the coming months as Covid concerns subside- and with it may come an easing of inflationary pressures. This will be a key influence on Fed policy, economic growth, corporate earnings, and valuation.
As for monetary policy, we believe it is prudent for the Fed to take its foot off the gas at this stage of the recovery (with rate liftoff likely to commence in 1st half 2022). But given that the Fed has been so important to equity markets since the credit crisis, a normalization of policy (and more hawkish pivot) could come with more moderate returns and normal volatility/choppiness over the coming year. Rate hikes alone do not derail equity markets and concerns become more heightened following a yield curve inversion, which is far off. We have a base case S&P 500 target of 5053 in 2022, and recommend a balanced but pro-cyclical tilt to portfolio positioning. With overall conditions likely to remain healthy, we would use pullbacks and rotation as opportunity. (M21-4020852)
Please note, next week’s Weekly Market Guide is also likely to be abbreviated. We wish you and your families a very Merry Christmas and Happy Holidays!
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