Wealth Management — April 29, 2022
- The S&P 500 index closed 3.6% lower on Friday, after Thursday's 2.5% rally, ending the month at 4,132. Additionally, the Nasdaq 100 dipped 4.5% on the day (down 21.2% year to date) and the Russell 2000 fell 2.8% (down 17.0% year to date).
- Over 96% of the S&P 500 constituents declined by the close of the last trading day of April as investors reviewed earnings commentary, COVID-19 lockdowns, anticipated monetary policy tightening, as well as pressures from geopolitics and inflation.
- Every S&P 500 sector was lower on the day, with Materials (-2.0%) and Energy (-2.5%) outperforming the broad market while Real Estate (-4.9%) and Consumer Discretionary (-5.9%) lagged.
- In just one month the S&P 500 declined 8.8%. This was the worst monthly decline since March of 2020 as well as the largest decline in the month of April since 1970. The index is now down 13.3% year to date.
- 1Q22 earnings reports have been the focus this week, as markets await a potential 50 basis-point hike at the FOMC meeting next week (May 3-4).
- As of the 4pm equity market close, the 10-year Treasury yield was around 2.91%, the 2-year Treasury yield was at 2.72%, and WTI oil was near $104 per barrel.
- Q1 Earnings: First quarter earnings season is half over as 55% of the S&P 500 constituents reported results thus far (273 companies) and 166 more are expected by the end of next week. For the S&P 500, 80.4% of the companies that reported beat earnings expectations. For 1Q22, the estimated earnings growth for the S&P 500 companies is running at 10.1% year-over-year (+4.4% y/y excluding the energy sector), according to Refinitiv. Strong earnings growth is expected from the Energy sector and a deceleration in earnings growth is anticipated from the Financials, Communication Services, and Consumer Discretionary sectors. During 1Q22 earnings calls, investors are closely monitoring forward guidance as well as the vulnerability of margins, earnings and valuations due to headwinds from higher input costs and deteriorating demand.
- Monetary Policy: Markets are keenly focused on next week's FOMC meeting (May 3-4). Following the Fed's hawkish comments of late, 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 expects the Fed will announce two 50-basis-point hikes at both the May and June meetings.
- Calendar: Construction Spending, ISM Manufacturing (5/2); JOLTS, Factory Orders, Motor Vehicle Sales, FOMC first meeting (5/3); Trade Balance, FOMC second meeting (5/4).
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.
Important note regarding economic sanctions. This event may involve the discussion of country/ies which are generally the subject of selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries or multi-national bodies. The content of this presentation is for informational purposes and does not represent Morgan Stanley’s view as to whether or not any of the Persons, instruments or investments discussed are or may become subject to sanctions. Any references in this presentation to entities or instruments that may be covered by such sanctions should not be read as recommending or advising on any investment activities involving such entities or instruments. You are solely responsible for ensuring that your investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.