Wealth Management — February 23, 2022
What Happened in the Markets?
- The S&P 500 declined 1.8% Wednesday to close at 4,226. With today's sell-off, the index is now down 11.3% year-to-date.
- US equities dropped for the fourth consecutive session as markets remain on edge over continued geopolitical tensions between Russia and Ukraine. On Tuesday, the US unveiled sanctions against Russia following the latter's recent escalation in tensions with Ukraine; on Wednesday, the US announced further sanctions that appeared to spark another sharp move lower in equities in the middle of the session. However, similar to Tuesday's trading action, while equities sold off broadly, interest rates actually moved higher across the curve.
- Ten of the 11 S&P 500 sectors were lower on the session, with Energy (+1.0%) the lone positive sector. Information Technology (-2.6%) and Consumer Discretionary (-3.4%) lagged the broader market.
- Interest rates moved higher across the curve, with 10-year Treasury yields trading to 1.98% as of the 4 p.m. equity market close. WTI oil was slightly higher, trading at $92 per barrel, while gold was also modestly higher above $1,900 per ounce. The US dollar strengthened as measured by the US Dollar Index.
- The Nasdaq 100 declined 2.6% and the Russell 2000 Index dipped 1.8%.
What to Watch Going Forward
- Geopolitical Tensions: Uncertainty remains elevated following Russia's announcement this past weekend that it would recognize two separatist groups in eastern Ukraine as independent regions. The move prompted response from the international community, and on Tuesday the US announced sanctions against Russia in response to the recent escalation in Ukraine. On Wednesday, the US followed up with more sanctions against Russia, which prompted a new leg lower in stocks in the afternoon; as a result, the S&P 500 ended up closing near its lows of the day, and is now down 11.9% from the January 3 all-time high. We expect markets to remain volatile in the near term as the situation remains fluid.
- 4Q21 Earnings: So far, 88% of the S&P 500 has reported earnings with 31% blended 4Q21 earnings growth year over year (y/y). Seventy-six percent of companies have beaten earnings expectations with an aggregate beat rate of 5.9%, which is above the median rate of 5.1% since 2008. Energy and Information Technology sectors have been the biggest contributors to earnings growth this quarter, while Utilities and Consumer Staples have lagged. While results have been strong, forward guidance has been mixed with the ratio of negative to positive earnings guidance currently the highest since 2016. There are 27 more companies expected to report this week.
- 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. While geopolitical uncertainty is currently affecting market sentiment and short-term conditions, the Federal Reserve will continue to monitor incoming inflation and economic data in the coming months to help guide future monetary policy actions.
- Economic Calendar: Weekly Jobless Claims, New Home Sales (2/24); Personal Income and Spending, Durable Goods Orders, University of Michigan Sentiment (2/25).
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.