The 1% Move Report

Wealth Management — February 11, 2022

• The S&P 500 declined 1.9% Friday to close at 4,419. With today's sell off, the index is now down 7.3% year-to-date. 
• US equities declined for the second straight session, falling sharply into the weekend; it appeared that heightened geopolitical tensions between Ukraine and Russia drove a sell off across risk assets. While yields surged higher on Thursday after US CPI came in above expectations, on Friday afternoon yields reversed sharply lower, presumably on a 'flight to safety' trade given geopolitical concerns. Oil prices also jumped higher, with WTI trading near $94 per barrel for the first time since 2014. In economic data, University of Michigan Consumer Sentiment missed expectations handily, falling to its lowest level since 2011. 
• Energy equities outperformed following the oil price spike as the sector gained 2.8%, while Consumer Discretionary (-2.8%) and Information Technology (-3.0%) lagged. 
• The Nasdaq 100 fell 3.1% and the Russell 2000 Index dipped 1.0%. 10-year Treasury yields fell to 1.92% as of the 4pm equity market close, while WTI oil closed at nearly $94 per barrel and gold was also sharply higher to $1,860 per ounce.

• Geopolitical Tensions: News reports suggesting Russia could be preparing an imminent invasion of Ukraine sparked a risk off reaction across financial markets on Friday. The situation is ongoing and markets will pay close attention in the coming days to any updates and potential implications. On Friday, the initial reaction to heightening geopolitical tensions saw oil and gold prices spike, while Treasury yields and equities declined sharply. 
• 4Q21 Earnings: So far 72% of the S&P 500 has reported earnings with 31% blended 4Q21 earnings growth year over year (y/y). Looking out to the end of 2022, current consensus estimated earnings growth of 7.5% y/y has fallen from the January 1, 2022 estimate of 8.4% y/y growth. Additionally, earnings revision breadth (the difference between sell-side earnings estimates that are upwardly revised and downwardly revised over the total number of revisions) is trending down in Communication Services, Consumer Discretionary, Financials, and Materials. 62 companies are scheduled to report next week. 
• Rates and Monetary Policy: The CPI release on Thursday sent interest rates across the US yield curve surging, with 2-year yields notably rising over 20 basis points in what was the biggest daily move since 2009, though that move has partially reversed with today's drop in yields. Markets continue to gauge the timing and scale of future U.S. rate hikes that are anticipated to begin following the next Fed meeting March 15-16, and with Thursday's CPI print the market is now pricing in more than 6 hikes for 2022. 
• Economic Calendar: PPI, Empire State Survey (2/15); Industrial Production, Retail Sales, Business Inventories, NAHB Housing Market Index (2/16).

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 a 5%-15% correction 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 likely peaking, short-term tactical investors should upgrade their portfolios by dialing back extreme positioning and allocating more exposure toward high-quality cyclicals, defensives and growth at a reasonable price. We barbell Financials and Energy with exposure to Utilities, Staples and Healthcare.  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 a mix of cash/ultrashort duration, high yield credit, 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.