Wealth Management — April 21, 2022
- The S&P 500 declined 1.5% on Thursday to close at 4,394. The index fell 2.6% from its early morning intraday high, and is now down 7.8% year to date.
- US stocks traded lower for the third time in four sessions as hawkish central bank commentary caused another surge in Treasury yields. Federal Reserve Chairman Jerome Powell said a 50 basis point hike is on the table for the May meeting, commenting that it may now be warranted to front-end load monetary policy tightening. There were also several European Central Bank (ECB) officials who gave hawkish commentary, stating that quantitative easing (QE) could end in July of this year and rate hikes would ensue soon thereafter. Yields across the curve moved sharply higher, including the 5-year Treasury yield which briefly eclipsed 3% during the session.
- All 11 S&P 500 sectors were lower, with Consumer Staples (-0.1%) and Real Estate (-0.6%) outperforming the broad market while Communication Services (-2.4%) and Energy (-3.1%) lagged.
- As of the 4pm equity market close, the 10-year Treasury yield rose to 2.90%, while the 2-year Treasury backed up 9 basis points, resulting in the yield curve flattening. WTI oil was slightly higher at just over $103 per barrel; gold traded below $1,950 per ounce. The US Dollar Index strengthened modestly.
- Monetary Policy: Hawkish central bank commentary from Federal Reserve Chairman Jerome Powell today and several ECB officials caused another leg higher in interest rates. While the futures markets are currently pricing a 100% chance of a 50 basis point hike for both the May and June FOMC meetings, Fed Chair Powell stated on Thursday it was "on the table." Regarding the Fed's balance sheet, the Fed minutes earlier this month showed that the committee was generally in agreement on reducing the size of the balance sheet by up to $95 billion per month, though the FOMC 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. In addition, on Thursday ECB officials mentioned the potential for three total hikes in 2022, and an end to its QE program in July.
- Q1 Earnings: 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, 87 companies reported 1Q earnings and 185 more are anticipated by the end of 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.
- Economic Calendar: S&P Global PMIs (4/22).
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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