Wealth Management — February 9, 2022
What Happened in the Markets?
- The S&P 500 rose 1.5% Wednesday, to close at 4,587. The index is now down 3.8% year-to-date, a 4.8% dip from its 52-week high.
- Equities rose for the second straight session as investors await Thursday's highly anticipated January CPI report. Strong earnings results from several consumer oriented companies as well as comments from Fed officials that suggested some inflation pressures that could soon ease may have contributed to the rally.
- Each of the eleven S&P 500 sectors closed the day higher. Communication Services was the best performing sector (+2.5%), with Real Estate (+2.4%), Information Technology (+2.3%) and Materials (+2.1%) traded closely behind. Consumer Staples (nearly flat on the day), Utilities (+0.4%), and Energy (+0.5%) all lagged the broader market.
- The Nasdaq 100 improved 2.1% and the Russell 2000 Index increased 1.9%. WTI oil closed at $90. The 10-year Treasury yield ended the day at 1.95% after trading to 1.96% Tuesday, which was the highest since August 2019. The CBOE Volatility Index (VIX) fell to near 20.
What to Watch Going Forward
- 4Q21 Earnings: So far 64% of the S&P 500 has reported earnings results with 30.5% blended 4Q21 earnings growth year over year (y/y). Looking out to the end of 2022, current consensus estimated earnings growth of 7.6% y/y has inched down from the January 1, 2022 estimate of 8.4% growth y/y. Additionally, earnings revision breadth (the difference between sell-side earnings estimates that are upwardly revised and downwardly revised over the total number of revisions) is trending down in Communication Services, Consumer Discretionary, Financials, and Materials. We expect to hear from an additional 34 companies by the end of the day Friday, and 62 more next week. Fundamentals, growth, and guidance remain the focus.
- Rates and the Fed: 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: CPI (2/10), University of Michigan Consumer Sentiment (2/11); Empire State Survey and PPI (2/15); Industrial Production, Retail Sales, Business Inventories, NAHB Housing Market Index (2/16).
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.