Wealth Management — August 25, 2022
- The S&P 500 rose 1.4% Thursday to 4,199 as every sector posted positive returns on light volume. The index is now down 11.9% year to date. The Nasdaq 100 gained 1.7% while the Russell 2000 Index improved 1.5%.
- As the end of second quarter earnings season nears, a few constituents within the S&P 500 Information Technology and Consumer Discretionary sectors posted earnings ahead of expectations today. Thus far for 2Q22, the 484 S&P 500 constituents that reported showed aggregate earnings growth of 7.3% alongside sales growth of 13.9%, according to Factset. Morgan Stanley's Global Investment Committee remains skeptical on the sustainability of operating margins in future quarters.
- In other news, while a plan for student loan forgiveness and forbearance was announced yesterday, the timing and implementation of this program and market implications remain uncertain. Additionally, investors await Fed Chair Powell's commentary when he speaks at the monetary policy conference at Jackson Hole tomorrow as well as the Personal Consumption Expenditures (PCE) inflation report which will be released in the morning.
- All 11 S&P 500 sectors ended the day higher. Materials (+2.3%) and Communication Services (+2.1%) were the largest relative outperformers while Utilities (+0.6%) and Consumer Staples (+0.5%) lagged.
- As of the 4pm equity market close, the 10-year Treasury yield declined to 3.03% and 2-year yields decreased to 3.37%. WTI oil closed 1.9% lower to $93 per barrel, while gold rose to $1,758 per ounce.
- Monetary Policy: In July, the Federal Open Markets Committee (FOMC) announced its unanimous decision for a second consecutive 75-basis-point rate hike. Additionally, Fed Chair Powell indicated that future rate decisions will be made meeting by meeting and "another unusually large increase could be appropriate in September. As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases." MS & Co. economists forecast a 50-basis-point hike at the September FOMC meeting, followed by an additional 50-basis-point hike in November as well as a 25-basis-point hike in December to a peak rate of 3.625%. Regarding the balance sheet reduction program, which is anticipated to ramp through September, Fed Chair Powell communicated that the process to get back to equilibrium may take two to two-and-a-half years.
- Economic Calendar: Fed Chair Powell speaks at Jackson Hole, US Personal Income, UMich Sentiment, PCE Deflator (8/26).
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 June 2023 base case provides a target of 3,900 for the S&P 500. This scenario assumes earnings and revenue growth decelerates due to high cost pressures in a slowing growth environment. Our June 2023 bear case of 3,350 considers a slowdown in earnings growth rate, margin pressure, sticky inflation, and a recession. Our June 2023 bull case of 4,450 corresponds to a soft landing environment where earnings growth slows but remains positive, inflation decelerates, cost pressures ease, and confidence improves. This bull case forecast embeds an estimate of 17.9x forward June 2024E earnings. 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 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.