Wealth Management — February 17, 2022
What Happened in the Markets?
- The S&P 500 declined 2.1% Thursday to close at 4,380. With today's dip, 33% of index constituents are down more than 20% from 52-week intraday highs. The index is now down 8.1% year-to-date.
- US equities have been volatile as markets react to headlines surrounding geopolitical tensions between Russia and Ukraine. Markets took on a particularly defensive tone on Thursday as Treasury bonds rallied across the curve, gold rose over 1% while Consumer Staples and Utilities were the only positive S&P 500 sectors in the session. In economic data, housing starts missed expectations while weekly jobless claims were larger than consensus forecasts.
- Nine of the 11 S&P 500 sectors were lower on the session, with Consumer Staples (+0.9%) and Utilities (+0.1%) the only sectors positive. Communication Services (-3.0%) and Information Technology (-3.1%) were the largest laggards on the day.
- 10-year Treasury yields declined to 1.96% as of the 4 pm equity market close and the US dollar Index modestly strengthened. WTI oil prices declined 2% with WTI trading near $92 per barrel, while gold gained more than 1%, closing in on $1,900 per ounce.
- The Nasdaq 100 declined 3.0% and the Russell 2000 Index dipped 2.5%.
What to Watch Going Forward
- 4Q21 Earnings: So far, 82% 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 revised upward and downward over the total number of revisions) is trending down in Communication Services, Consumer Discretionary, Financials, and Materials. There are eight additional companies that are anticipated to report earnings through Friday and another 56 by the end of next week.
- Economic Data Updates: This week's economic reports showed Industrial Production, Capacity Utilization and Retail Sales all came in ahead of expectations, while housing data was mixed with NAHB Housing Market Index reporting above consensus and housing starts below. Jobless claims climbed on Thursday, reporting above expectations and higher than the prior month's reading.
- 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: Leading Index, Existing Home Sales (2/18).
The Global Investment Committee’s Outlook
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.