Wealth Management — February 25, 2022
What Happened in the Markets?
- The S&P 500 traded sharply higher on Friday as the index gained 2.2% to close at 4,385. With today's rally, the index is now down 8.0% year-to-date.
- It was a volatile, holiday-shortened trading week for US equities as geopolitical concerns weighed on financial markets. While news of Russia's invasion into Ukraine sent the S&P 500 more than 5% lower on the week at Thursday's intra-day trough, a strong rally subsequently saw the index recover its losses to end the week up just 0.8% from last Friday's close. Despite all of the intra-week volatility, the reaction across markets mirrors the S&P 500 - crude oil and the US Dollar ended the week only slightly higher, gold reversed to finish slightly lower on the week and 10-year Treasury rates actually rose modestly versus last Friday's close. The reaction across markets suggests that perhaps some of the geopolitical risk was already priced, though the situation remains fluid and volatility will likely remain elevated in the coming weeks. Outside of geopolitics, markets are likely to focus on economic data and next month's Federal Reserve meeting.
- All 11 S&P 500 sectors were higher on the session with Materials (+3.6%) and Financials (+3.2%) outperforming the broad market, while Communication Services (+1.5%) and Information Technology (+1.4%) lagged.
- Interest rates were relatively flat across the curve, with 10-year Treasury yield at 1.96% as of the 4 p.m. equity market close. WTI oil was lower to $92 per barrel, while gold was also lower to just below $1,900 per ounce. The US dollar modestly strengthened as measured by the US Dollar Index.
What to Watch Going Forward
- Geopolitical Tensions: Tensions remain elevated between Russia and Ukraine, with Russia invading on Wednesday night. In response to Russian aggression, the US announced a new wave of sanctions on Thursday, adding onto a series of sanctions put forth earlier in the week. Equity markets have taken the news in stride the past two trading sessions, with momentum from Thursday's strong intraday reversal continuing on Friday. In fact, with today's rally, the S&P 500 erased the week's losses, and snapped a two week losing streak.
- 4Q21 Earnings: Earnings season is almost over with 95% of the S&P 500 already reported results. S&P 500 recording 31% blended 4Q21 earnings growth year over year (y/y), while 77% 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. While results have been strong, forward guidance has been mixed with the ratio of negative to positive earnings guidance making multi-year highs.
- 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: ISM Manufacturing, Construction Spending (3/1); ADP Employment Change (3/2); Jobless Claims, ISM Services, Durable Goods Orders (3/3); Nonfarm Payrolls, Unemployment Rate (3/4).
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 US dollar against a subset of the broad index currencies that circulate widely outside the US.