Wealth Management — April 14, 2022
- The S&P 500 declined 1.2% on Thursday to close at 4,393. The index is now down 7.8% year to date.
- Markets closed the holiday-shortened week on a sour note with equities trading lower on Thursday. After a couple of days of reprieve from higher interest rates, yields rose again across the curve on Thursday. Technology and long-duration growth stocks experienced outsized weakness in the session, dragging broader markets lower in the process. In economic data, retail sales and University of Michigan consumer sentiment readings were reported above consensus. Focus this week was predominantly centered on inflation readings, with headline CPI recording the highest level since 1982, while PPI was above consensus on Wednesday. Bank earnings were mostly constructive, but price reactions were mixed. Expect focus next week to continue on Q1 earnings with over 15% of S&P 500 market cap scheduled to report results.
- Nine of the 11 S&P 500 sectors were lower, with Energy (+0.4%) and Utilities (+0.0%) outperforming the broad market while Communication Services (-1.8%) and Information Technology (-2.5%) lagged.
- As of the 4pm equity market close, the 10-year Treasury yield rose to 2.83%. WTI oil rallied to above $106 per barrel. The US Dollar Index strengthened modestly.
- Q1 Earnings Preview: For the S&P 500, bottom-up, share-weighted 1Q22 earnings growth is anticipated to be 5.5% YoY, with strong earnings growth expected from the Energy sector and a deceleration in earnings growth from the Financial sector. Excluding Energy, the S&P 500 share-weighted earnings growth is estimated to decline 0.1%. Similarly, excluding Financials, S&P 500 share-weighted earnings growth is expected to be 13.7% higher. Thus far, 33 companies reported 1Q earnings and 76 more are anticipated next week. During 1Q22 earnings calls, investors will be closely monitoring forward guidance as well as vulnerability of margins and earnings due to headwinds from higher input costs and deteriorating demand.
- Monetary Policy: Last week, the FOMC's meeting minutes showed many policymakers approve of a 50-basis-point hike at future meetings, should the data and conditions warrant it. Additionally, the minutes showed the committee was generally in agreement on reducing the size of the balance sheet by up to $95 billion per month, though had not yet decided on when to commence balance sheet reduction. A formal announcement could come as soon as the next FOMC meeting in May. MS & Co. Chief US Economist Ellen Zentner currently expects two 50-basis-point hikes at both the May and June meetings, while the market is currently pricing an 98% chance of a 50-basis-point hike in May and 84% chance for June.
- Geopolitics and COVID Updates: As the conflict between Russia and Ukraine carries on, sanctions continue. Supply chains remain on pause as the COVID-19 shutdown has been extended in Shanghai.
- Economic Calendar: Industrial Production (4/15).
With the Fed poised to respond to 40-year highs in inflation through both rate hikes and balance sheet run-off in 2022, the GIC’s call for continued caution in the indices remains intact. Our base case year-end 2022 target of 4,400 for the S&P 500 and our bull case of 5,000 corresponds to a view that rising rates and higher policy uncertainty demands lower price/earnings ratios and our forecast embeds an estimate of 18x forward earnings, despite a forecast for earnings growth of 10%-12% in 2022. With earnings revisions moving lower off the prior peak, investors should focus on risk management through quality factor exposure, defensiveness with regard to interest rate sensitivity, and attention to stock-specific valuations. We are moving to a position of maximum diversification by sector and market cap, with interesting ideas being found in Energy, Industrials, Materials, Healthcare, Consumer Services, Financials, Utilities and Staples. While the US recovery matures, we see opportunities outside the US as relatively more attractive especially given less expensive valuations and exposure to economic cyclicality. In fixed income, the challenge is two-fold: generating sufficient income, while also preserving capital in a rising rate and higher inflation environment. This requires a diversified and active exposure, with our preference for core investment grade, preferreds, leveraged loans, and asset-backed securities, including select mortgage-backed, and dividend-paying stocks. Real assets such as gold, infrastructure, and real estate present an attractive opportunity as a portfolio ballast for income generation and as an inflation hedge.
Market data provided by Bloomberg.
Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.
NASDAQ Composite Index: A broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market.
S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
US Trade-Weighted Dollar Index: A weighted average of the foreign exchange value of the 17US dollar against a subset of the broad index currencies that circulate widely outside the US.
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