September 9, 2021
Equity investors climbed the so-called “wall of worry” to propel stock markets higher again in August, with the S&P 500 Index posting its best month since April. With the 10-year Treasury yield closing the month at +1.30 percent, the “there-is-no-alternative” effect continues to buoy equity returns.
With financial markets awash in liquidity, equity investors have so far largely shrugged off gathering macro risks in anticipation of historically robust fourth-quarter equity market returns and a substantial federal spending package. However, persistent global supply constraints and associated cost increases could weigh on corporate earnings in the third and fourth quarters, dampening prospects for a typical year-end rally. The acceleration in Covid-19 infections globally, especially with China’s “zero-Covid” mandate, has intensified supply chain logjams and inflationary pressures.
We expect increased equity market volatility in the months ahead as investors discount gathering risks and uncertainties. As a result, we may hold slightly more cash in portfolios in the interim as a hedge against near-term downside risks and in anticipation of attractive buying opportunities. Technology remains a preferred sector given its solid relative earnings growth profile, and the healthcare sector is increasingly attractive for the same reason.