Wealth Management — April 26, 2022
- The S&P 500 declined 2.8% on Tuesday to close at 4,175. The index is now down 12.4% year to date.
- US stocks were unable to build on Monday afternoon's strong intraday reversal as the S&P 500 fell 2.8% Tuesday. While interest rates were lower across the curve today, mega-cap growth and technology stocks led the decline; perhaps investors decided to take some risk off the table ahead of the busiest week of earnings which includes a number of the large cap technology names. In today's economic data, home prices surprised to the upside while consumer confidence and new home sales came in below expectations. Oil marched back above $100 per barrel, which allowed the Energy sector to outperform - it was the only S&P 500 sector recording a gain in the session, albeit modest.
- Ten of the 11 S&P 500 sectors were lower, with Energy (+0.04%) and Utilities (-1.0%) outperforming the broad market while Information Technology (-3.7%) and Consumer Discretionary (-5.0%) lagged.
- As of the 4pm equity market close, the 10-year Treasury yield declined to 2.75%, WTI oil rallied back above $100 per barrel and gold traded above $1,900 per ounce. The US Dollar Index strengthened modestly to above $102.
- Q1 Earnings: First quarter earnings season is well underway as 26% of the S&P 500 constituents have reported results thus far. 132 companies reported 1Q earnings and 130 more are anticipated by the end of next week. For the S&P 500, 81% of companies that reported have beat expectations. Blended 1Q earnings growth is running at 7.2% year-over-year including companies not yet reported, and 2.0% for companies already reported, according to FactSet. Strong earnings growth is expected from the Energy sector and a deceleration in earnings growth from the Financials, Communication Services, and Consumer Discretionary sectors. During 1Q22 earnings calls, investors are closely monitoring forward guidance as well as vulnerability of margins, earnings and valuations due to headwinds from higher input costs and deteriorating demand.
- Monetary Policy: After the latest bout of hawkish global central bank commentary from Federal Reserve Chairman Jerome Powell and many ECB officials last week, markets will be keenly focused on next week's FOMC meeting. Particular attention will be given to comments related to the Fed's balance sheet, with a potential formal announcement on when balance sheet reduction could start. Currently, futures markets are pricing a 100% chance of a 50 basis-point hike for both the May and June FOMC meetings. MS & Co. Chief US Economist Ellen Zentner also expects two 50-basis-point hikes at both the May and June meetings.
- Economic Calendar: Pending Home Sales (4/27); US GDP, US Core PCE, Jobless Claims (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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