Weekly Market Guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
Short-Term Summary:
All eyes remain on the Omicron variant spread, though indications continue to come in overall better than feared. The virus has been highly transmissible, but relatively mild so far. We are also encouraged by peaking cases in South Africa, roughly one month from the surge’s onset. While the situation remains very fluid, we are optimistic that the global reopening can progress over the coming months as Covid concerns subside- and that inflationary pressures can ease as this transpires. This will be a key influence for markets in 2022, and investors will get December updates in a full macro slate next week- not only ongoing Covid trends, but also the December ISM, PMI, and Jobs report.
Equities have been strong over the past week with the S&P 500, along with the equally-weighted index, pushing to record highs. We also note that some of the more economic sensitive areas such as the Rails and Hotels have shown recent strength despite Covid cases still rapidly rising. Improving market breadth is supportive of overall technical trends as we enter 2022, and also contributes to our recommended portfolio positioning. We are sticking with our balanced, but pro-cyclical tilt – maintaing a healthy allocation to Technology (on strong fundamental momentum, combined with stubbornly low interest rates) but also accumulating the areas with greater leverage to a reopening. Over the next 6-12 months, we have a bias for bond yields to grind higher as the global economic recovery progresses and the Fed ends QE (with rate hikes)- and this may correlate with rotation into the more recovery-oriented areas.
We expect overall conditions to remain healthy in 2022 with above-trend economic growth supporting solid earnings growth. Valuation is likely to moderate, but can stay above average if interest rates remain tame and inflation subsides toward more normal 2-3% levels. Our base case assumptions produce a S&P 500 target of 5053 in 2022. That said, the overall pace of market ascent is likely to moderate as the Fed comes off of its ultra-lenient policy (given Fed actions have been such a key influence on equities post-credit crisis). Rate hikes alone do not derail equity markets and concerns become more heightened following a yield curve inversion, which is far off. We expect normal periods of volatility and choppiness over the coming year, but would use those periods (along with market rotation) as opportunity. For more detail on our outlook, please see our recently published 2022 Equity Market Outlook.
We wish you and your families a happy, safe, and prosperous New Year! (M21-4051825)
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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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