Wealth Management — April 5, 2022
- The S&P 500 declined 1.3% on Tuesday to close at 4,525. With the sell-off, the index is now down 5.1% year to date.
- Stocks sold off on Tuesday in what was largely a reversal of the prior day's gains. Growth and technology shares underperformed as interest rates were sharply higher across the curve, while defensives Utilities and Health Care were relative leaders. Tuesday's focus appeared to be on remarks from Federal Reserve President Lael Brainard, who stated the Fed could start reducing its balance sheet as soon as May at "a rapid pace." In geopolitics, additional sanctions are expected to be announced against Russia by the US, EU, and Group of Seven, which includes a ban on new investments in the country. Markets will turn attention to Wednesday's FOMC meeting minutes, which could unveil more thinking on the Fed's path for tightening policy and Q1 earnings season, which is set to begin next week.
- Four of the 11 S&P 500 sectors were higher, with Utilities (+0.7%), Health Care (+0.2%) outperforming the broad market while Information Technology (-2.2%) and Consumer Discretionary (-2.4%) lagged.
- As of the 4pm equity market close, the 10-year Treasury yield rose to 2.55%, its highest level in three years. WTI oil declined to $100 per barrel while gold was also lower close to $1,920 per ounce. The US Dollar strengthened as measured by the US Dollar Index.
- Monetary Policy: At its March meeting, the Fed delivered its first rate hike since 2018 along with a projection of 1.9% for the Fed Funds rate by the end of 2022 and a median of 2.8% for the following two years. This suggests seven rate hikes (including the one just announced) could occur by the end of 2022. Fed Chair Powell noted that the timing and size of these hikes will not be determined until incoming data is reviewed and the outlook is assessed at each meeting. Additionally, the balance sheet reductions, which Powell expects to announce "at a coming meeting," may be equivalent to another rate increase. This aligns with the Fed's recent stance that it will be more nimble regarding monetary policy actions and observe incoming data closely. Since then, Federal Reserve Presidents have provided commentary indicating that 50 basis point hikes are possible if the data calls for it. MS & Co. Chief US Economist Ellen Zentner now expects two 50 basis point hikes at both the May and June meetings, with the market currently pricing a 84% of a 50 basis point hikes in May and 75% chance for June.
- Geopolitics: As the war between Russia and Ukraine carries on, sanctions by the West are starting to pile up. New sanctions on Tuesday were announced by the US, European Union and Group of Seven; the sanctions include a ban on all new investment in Russia in addition to other sanctions on state-owned enterprises, individuals and institutions.
- Economic Calendar: FOMC Meeting Minutes (4/6); Jobless Claims, Consumer Credit (4/7).
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 toward risk management through quality factor exposure, defensiveness with regards 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 toward 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 US dollar against a subset of the broad index currencies that circulate widely outside the US.