The 1% Move Report

Wealth Management — February 24, 2022

• The S&P 500 rose 1.5% Thursday to close at 4,289. With today's rally, the index is now down 10.0% year-to-date.
• US equities mounted a strong intraday rally on Thursday, after falling sharply at the open following developments in the Russia/Ukraine situation overnight. Markets have been volatile in recent sessions as tensions have increased between the two nations. On Wednesday evening, Russia invaded Ukraine which prompted risk off trading across financial markets into Thursday morning with Treasuries, gold, the US Dollar and oil all rallying, while equities sold-off sharply. Those early morning moves largely reversed into the afternoon, however, with equities ending the session higher and Treasury yields only modestly lower on the day. Underscoring the reversal, the Nasdaq 100 closed more than 3% higher on the session after falling more than 3% in early morning trading.    
• Seven of the 11 S&P 500 sectors were higher on the session, with Information Technology (+3.5%) and Communication Services (+3.1%) outperforming the broad market, while  Financials (-1.2%) and Consumer Staples (-1.7%) lagged. 
• Interest rates moved lower across the curve, with 10-year Treasury yields trading to 1.96% as of the 4 p.m. equity market close. WTI oil was higher at above $93 per barrel, while gold was modestly lower just below $1,900 per ounce. The US dollar strengthened as measured by the US Dollar Index.

• Geopolitical Tensions: Tensions continue to remain elevated between Russia and Ukraine, with Russia invading overnight, which prompted global risk off trading across many asset classes early on in Thursday's session. In response to Russian aggression, the US announced a new wave of sanctions, adding onto a series of sanctions put forth in prior days. While equity markets traded sharply lower in initial response to Wednesday night's invasion headlines, a strong intraday reversal saw the S&P 500 close at its high for the session. While markets appeared to take the latest news in stride on Thursday, expect markets to remain volatile in the near term as the situation remains fluid.
• 4Q21 Earnings: So far, 93% of the S&P 500 has reported earnings with 31% blended 4Q21 earnings growth year over year (y/y). Seventy-seven 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 11 more companies expected to report on Friday. 
• 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 on 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: Personal Income and Spending, Durable Goods Orders, University of Michigan Sentiment (2/25).

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 US dollar against a subset of the broad index currencies that circulate widely outside the US.