The 1% Move Report

Wealth Management — January 18, 2022

• US stocks traded lower on Tuesday as the S&P 500 declined 1.8% to close at 4,577. With the sell-off, the index is down 4.0% year to date.  
• Stocks sold off sharply as bond yields surged higher to begin this week's trading, as equity markets continue to come under pressure following two straight weeks of losses for the S&P 500 to kick off 2022. As has been the case for much of the past few weeks, equity markets appeared to take their cue from rates on Tuesday, with high multiple growth stocks coming under outsized pressure as 10-year yields moved to their highest levels since the pandemic began nearly two years ago. Looking ahead, expect markets to focus on 4Q earnings reports this week and the January FOMC meeting next week.  
• Ten of the 11 S&P 500 sectors traded lower on Tuesday, with Energy (+0.4%) and Real Estate (-0.7%) outperforming the broader market, while Financials (-2.3%) and Information Technology (-2.5%) lagged. 
• Rates were higher across the curve, with the 10-year Treasury yield rising to 1.87% as of the 4 p.m. equity market close. Gold was slightly lower on the day while WTI oil was higher to over $85 per barrel. The US dollar was modestly stronger on the trading session, as measured by the US Dollar Index.

Equity markets traded lower on Tuesday following the long holiday weekend as the S&P 500 declined 1.8%. Today's sharp sell off follows two straight weeks of declines for the index, with the S&P 500 now down 4.0% year-to-date. As has been the case in recent weeks, equity markets are taking their cue from rates, as higher Treasury yields and the Federal Reserve's hawkish pivot appear to be weighing on investor sentiment. On Tuesday, 10-year Treasury yields rose nearly 0.1% to settle above 1.87%, marking the highest level for the 10-year since January 2020. With the move higher in bond yields, high-multiple growth stocks have come under pressure, and this was the case again on Tuesday with the NASDAQ 100 falling more than 2%. While in recent weeks financial stocks have moved higher alongside bond yields, that pattern has broken in recent sessions as several large-cap banks have sold-off sharply following poorly received 4Q earnings releases; on Tuesday Financials were the second worst performing S&P 500 sector despite the move higher in yields. While recent market attention has focused largely on macro drivers such as the Fed's hawkish pivot and the potential impact the Omicron variant could have on economic growth, expect focus to return to corporate fundamentals as 4Q earnings season heats up with nearly 10% of the S&P 500 by market cap releasing results this week. The Fed will also remain in focus ahead of next week's January FOMC meeting.

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 versus the current 21.5x today, 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.