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Today’s Bond Blunder? Parking Too Much Money Short Term

Weekly Market Guide

  • 09.24.21
  • Markets & Investing
  • Commentary

Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.

Short-Term Summary:

After closing just below its 50-day moving average on Friday, the S&P 500 experienced its heaviest day of selling since May on Monday (-2.74% on 91.5% downside volume). Reduced concerns over the threat of China Evergrande debt contagion, along with supportive takeaways from the FOMC meeting yesterday have the S&P 500 rebounding back above its 50-day moving average today as it attempts to regain support. In our view, this reflects the resiliency embedded in the market (since last November), as investors have been quick to “buy-the-pullback” in this current recovery/low-rate environment.

Technically, we would like to see the index hold above its 50 DMA and make a higher high in the coming days/ weeks. If the index is unable to make a higher high, the recent consolidation/pullback may have more to go- potentially range-bound trading as the index rebuilds momentum. On the downside, we see technical support in the 4233-4250 area, followed by longer-term support at ~4165. We believe a pullback would likely hold above this 4165 area (~8% from recent September 2nd highs) unless the narrative materially changes.

The Fed gave a strong indication for Fed tapering to be announced at the November 3rd FOMC meeting- likely beginning in December and concluding in the summer of 2022. The Fed will remain accommodative to the economic recovery, and we do not view tapering as tightening. Rate liftoff remains a ways off (likely late 2022 at the earliest) and will come as the economy is able to handle it. Within the Fed’s report, the Committee lowered its 2021 GDP growth estimate to 5.9% from 7.0% but raised its 2022 estimate to 3.8% from 3.3%. This supports our view that the Delta variant and supply chain issues are acting as a drag to economic activity this year, but also that this growth is just being delayed (not destroyed) as demand remains strong.

The bond market has been a good barometer of underlying economic momentum, in our view, as downside in interest rates accurately reflected some underlying issues within the economic recovery (i.e. supply chain, inflation, slowdown, etc.). There has also been a strong correlation between the US 10-year Treasury yield and relative performance of the S&P 500 equal-weighted index over the past year. And in the aftermath of the FOMC meeting yesterday, the US 10-year Treasury yield is attempting to push above resistance in the 1.39-1.40% area. A break above could be the catalyst for a grind higher in interest rates, which should support relative performance of the more economically-sensitive areas (i.e. energy, financials, industrials, select consumer discretionary). We see opportunity here and would accumulate favored stocks in these sectors as momentum builds.

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