Wealth Management — February 15, 2022
- After three straight days of down markets, the S&P 500 rose 1.6% Tuesday to close at 4,471. With today's gains, the index is now down 6.2% year-to-date.
- US equities rallied as investors continued to navigate markets amidst a changing geopolitical environment and alongside steeper inflation data, weaker consumer confidence and a U.S. Fed planning actions for monetary policy tightening. News reports indicated potential easing of tensions between Russia and Ukraine which could have boosted sentiment Tuesday, though the situation still remains fluid.
- 10-year Treasury yields rose 7 basis points to 2.05%, 2-year Treasury yields remained around 1.58%, and the US dollar index declined to $96. Oil prices closed the day down 3.7%, with WTI trading near $92 per barrel.
- The S&P 500 Energy sector underperformed the S&P 500 index as the sector dipped 1.4% while Information Technology gained 2.7% and Consumer Discretionary gained 2.1%.
- The Nasdaq 100 gained 2.5% and the Russell 2000 Index increased 2.8%.
- 4Q21 Earnings: So far 74% 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. 49 companies are scheduled to report later this week.
- PPI: Today's Producer Price Index data report indicated that PPI rose 9.7% year over year, above the expected growth of 9.1% driven in part by goods like motor vehicles and fuel. Headline PPI gained 1.0% since December and Core PPI (excluding food, energy and trade services) rose 0.9% sequentially, with final demand services (less trade, transportation, and warehousing) reporting stronger pricing.
- Monetary Policy: Markets continue to gauge the timing and scale of future U.S. rate hikes and balance sheet adjustments that are anticipated to begin following the next Fed meeting March 15-16.
- Economic Calendar: Industrial Production, Retail Sales, Business Inventories, NAHB Housing Market Index (2/16); Housing Starts (2/17); Leading Indicators, Existing Home Sales (2/18).
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.