Market Strategy 10/04/2021

Key Takeaways

• Markets this week are likely to take their cue from economic data as they look to Friday’s employment report for clues as to the strength of the US economy.
• On October 13, Q3 earnings season will begin in earnest as the big banks report. This week offers reports from several widely followed names that could provide a sense of what may lie ahead for several of the other sectors, including consumer discretionary and staples.
• Since early August investors have once again shown favor for valueoriented cyclicals versus growth stocks as Treasury yields have moved up and the yield curve has steepened. 

This first full week in October will provide investors with a brace of economic data that should help provide a clearer read on how the US economy is doing in the process of the ongoing transition out from under pandemic oppression and into “the next new normal”.

Over the course of the last few weeks the equity market has shown a heightened degree of sensitivity to ongoing political wrangling in Washington reminiscent to the market activity around the taper tantrum of 2013 that surrounded the exit process from the Great Financial Crisis.

The on-again, off-again nervousness about Federal monetary policy, the disruption among supply chains and the potential for higher taxes (along with other concerns such as inflation risk and higher taxes) have kept market enthusiasm in check. Meanwhile rotation and rebalancing efforts along with some profit taking by skeptics, bears and nervous investors account for a significant part of market activity on any given day.

Curiously, investor worries about COVID-19 and its variant seem to have begun to play a lessor day-to-day “worry role” in the markets of late than over the course of the summer. Perhaps it was the announcement last week by a major US pharmaceutical company of a drug submitted for regulatory approval that can be delivered orally to combat COVID-19, or interviews in the press and elsewhere with medical experts and agency officials that suggest the pandemic risk is becoming more manageable as vaccination mandates become more prominent in the US, providing support for the economy to re-open further and with greater success than was the case with previous efforts.

Progress toward resolving the political logjam in Washington over the debt ceiling and infrastructure proposals could also bolster investment sentiment this week. Beyond key economic data to be released, a few S&P 500 companies are also reporting Q3 results this week (though it’s still early in the reporting season) and these should provide clues and touchstones for investors to gauge where the economy and stocks might be headed in the near term.

Last week’s market action saw the broad market move lower on three out of five sessions. Among the major indices the Dow Jones Industrial Average, S&P 500, the S&P 400 (mid-caps), the Russell 2000 (small Caps) and the NASDAQ Composite respectively declined 1.36%, 2.21%, 0.58%, 0.29% and 3.20%.

The S&P 600, considered to be a high quality benchmark of small cap stocks, was the only one of the six major US indices to post a gain, rising O.94% on the week. We should note that the S&P 600 is the best performer year to date among the major indices we track regularly.

Last week’s performance among the six major US indices we track indicated investors’ favor for small and mid-cap stocks, a preference for value over growth while showing continued favor for cyclicals over defensive sectors.

In our view the markets continue to be prone to rebalancing and rotation on a month to month, week to week even day to day basis as the process of economic transitioning from a period dominated by COVID-19 worries morphs into the “next new normal” with prospects for the stateside economic recovery to move toward a sustainable (likely moderately paced) economic expansion that should be sufficient in strength to foster a global economic recovery sooner than many expect.

Monday

• Factory Orders
• Durable Goods

Tuesday

• ISM Services Index

Wednesday

• MBA Mortgage Applications
• ADP Employment Change

Thursday

• Challenger Job Cuts
• Initial Jobless claims
• Consumer Credit

Friday

• Change in non- farm payrolls
• Unemployment rate
• Average Hourly Earnings

• We continue to favor equities in the current transitional environment.
• We remain overweight US equities while maintaining meaningful exposure to international developed and emerging equity markets.
• We persist in favoring information technology and cyclicals over defensive sectors as well as maintaining exposure across large, mid, and small capitalizations.
• For style, we prefer a barbell approach with both value and growth in what is likely to remain a low interest rate environment, even after yields move higher in response to what we expect will be a sustainable economic expansion stateside that will feed a global economic recovery for our global asset allocation).
• Dividend portfolios incorporating positions in “growthier” value and in GARP (growth stocks at a reasonable price) stocks in our view are worth consideration, particularly for investors seeking current income with potential for capital gains.
• Among the immediate risks that populate the landscape are COVID-19 and its variants, the process of economic re-openings stateside and elsewhere around the world that lie ahead, perception of inflation risk, domestic politics, geopolitics and the perennial risks that lie in the realm of the unexpected.