Wealth Management — February 3, 2022
What Happened in the Markets?
- The S&P 500 declined 2.4% Thursday to close at 4,477. The index is now down 6.1% year-to-date, a 7.1% dip from its 52-week high.
- Market pressure began after Wednesday's close following the earnings announcement of a mega-cap social media stock that identified headwinds for future growth. On Thursday, markets were watchful post commentary from the European Central Bank President that led the market to adjust its expectations toward the timing of monetary tightening in Europe, and the fulfillment of another round of anticipated rate hikes by the Bank of England. As the day progressed, mixed 4Q21 earnings from several Health Care and Industrials companies were announced and economic data came in below expectations, showing continued growth was compressed by pandemic induced headwinds.
- The weak performance of the Communication Services (-6.8%) sector reflected disappointing guidance provided by a mega-cap company after Wednesday's close. Consumer Discretionary (-3.6%), and Information Technology (-3.1%) lagged as well. The Consumer Staples sector was the only sector not in the red Thursday, trading flat in the session.
- The Nasdaq 100 fell 4.2% and the Russell 2000 Index dipped 1.9%. WTI oil closed just above $90, the highest price since 2014 while Natural Gas declined 10.5%. Gold increased beyond $1,800 per ounce. The 10-year Treasury yield ended the day higher at 1.83%, while the US dollar weakened. The CBOE Volatility Index (VIX) rose above 24.
What to Watch Going Forward
- 4Q21 Earnings: So far 52% of the S&P 500 has reported earnings results with 27% blended 4Q21 earnings growth year over year. However, earnings revision breadth is trending down with cyclicals showing relative weakness. We expect to hear from an additional 19 companies by the end of the day Friday, and 86 more next week. Fundamentals, growth, and guidance remain the focus.
- Rates and the Fed: Today, the Bank of England announced a second rate hike and the European Central Bank noted it is keeping interest rates the same despite higher than expected inflation. These moves followed Chair Powell's hawkish commentary during last week's FOMC meeting. In anticipation of U.S. rate hikes to begin in March and reductions to the balance sheet to occur shortly thereafter, Morgan Stanley Wealth Management Chief Investment Officer Lisa Shalett hosted a fireside chat with Morgan Stanley & Co. Research Chief U.S. Economist Ellen Zentner and Global Head of Macro Strategy Matthew Hornbach to discuss the Fed’s latest policy signals and the markets’ response. If you would like to listen to the discussion, please ask your Morgan Stanley Financial Advisor for "The Fed Has Spoken. Now What?”
- Economic Calendar: Nonfarm Payrolls/ Unemployment rate (2/4); NFIB Survey (2/8); CPI (2/10).
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.