Wealth Management — April 22, 2022
- The S&P 500 declined 2.8% on Friday to close at 4,272. The index is now down 10.4% year to date. Additionally, 40% of the index's constituents are down more than 20% from 52-week highs. Furthermore, on average, the S&P 500 constituents are down 18% from 52-week highs.
- Global central banks added hawkish commentary this week as markets continue to anticipate future rate increases and monetary tightening while juggling 1Q22 earnings reports. Next week, 180 companies will report 1Q22 earnings.
- All 11 S&P 500 sectors were lower, with Consumer Staples (-1.6%) and Utilities (-1.7%) outperforming the broad market while Materials (-3.7%) and Health Care (-3.6%) lagged.
- As of the 4pm equity market close: the Nasdaq 100 dipped 2.6%, the Russell 2000 index fell 2.6%, the 10-year Treasury yield was 2.89%, WTI oil was down 2.0% to $101.7 per barrel, gold traded below $1,933 per ounce, and the US Dollar Index strengthened past $101.
- Monetary Policy: Hawkish global central bank commentary continued today. Futures markets are currently pricing a 100% chance of a 50 basis point hike for both the May and June FOMC meetings. Yesterday, Fed Chair Powell spoke of how the Fed's March meeting minutes showed that officials backed the potential for a half-a-percentage rate hike and stated "50 basis points will be on the table for the May meeting." Regarding the Fed's balance sheet, the March FOMC meeting minutes that were released 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. The FOMC had not yet decided on when to commence balance sheet reduction, but 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: First quarter earnings season is well underway as nearly 20% of the S&P 500 constituents have reported. Of the companies that provided results thus far, earnings decelerated 2.7% while sales grew 7.7%. An Oil & Gas Producer disappointed to the downside along with a number of Banks and Financial Services companies. As of April 22, 2022, for the S&P 500 overall, including the companies that have not yet reported, bottom-up share weighted 1Q22 earnings growth is anticipated to be 6.9% YoY, with strong earnings growth expected from the Energy sector and a deceleration in earnings growth from the Financials, Communication Services, and Consumer Discretionary sectors. Excluding Energy, the S&P 500 share-weighted earnings growth is estimated to rise 1.2%. Similarly, excluding Financials, S&P 500 share-weighted earnings growth is expected to be 14.6% higher. Thus far, 98 companies reported 1Q earnings and 180 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: Durable Goods, Conference Board Consumer Confidence, New Home Sales (4/26); GDP (4/28); Employment Cost Index, Personal Income and Spending, U of Michigan Consumer Sentiment (4/29) .
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, Health Care, 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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