The 1% Move Report

Wealth Management — January 20, 2022

• US stocks traded lower on Thursday as the S&P 500 declined 1.1% to close at 4,483. With the sell-off, the index is down 6.0% year to date.  
• Stocks staged a sharp intraday reversal on Thursday, as early session gains gave way to steep losses for the major averages in the afternoon. Technology and growth stocks underperformed during the session, as the Nasdaq 100 fell over 3% from intraday highs to finish 1.3% lower. There was no clear catalyst for the reversal in equity markets, though a close below the closely watched 200-day moving average on the NASDAQ Composite for the first time since April 2020 may have dampened sentiment. Markets will continue to focus on 4Q earnings results, where next week over 30% of the S&P 500's market cap reports, in addition to next week's FOMC meeting held on Wednesday.  
• Ten of the 11 S&P 500 sectors traded lower on Thursday, with Utilities (+0.1%) and Health Care (-0.6%) outperforming the broader market, while Materials (-1.4%) and Consumer Discretionary (-1.9%) lagged. 
• Rates were lower across the curve, with the 10-year Treasury yield falling to 1.82% as of the 4 p.m. equity market close. Gold was slightly lower on the day while WTI oil was flat at just nearly $87 per barrel. The US dollar was modestly stronger on the trading session, as measured by the US Dollar Index.

Equity markets traded lower on Thursday as the S&P 500 declined 1.1%, falling for the third straight session. It was a volatile day on Wall Street, with strong early session gains being sold aggressively in the afternoon of the trading session. The Nasdaq 100 fell over 3% from intraday highs to fall 1.3% in the session, and is now in correction territory, down 10.4% from its November 19 closing high. While there was no clear catalyst for today's sharp turn lower in the middle of the session, on Wednesday the Nasdaq Composite closed below its 200-day moving average for the first time since April 2020; the break of this closely watched technical level may have potentially led to investors selling Thursday's early morning gains. While recent market action has focused on the Fed's hawkish pivot and the potential economic impact of the Omicron variant, fundamentals will be in focus with over 30% of S&P 500 market cap reporting Q421 results next week, including several mega cap technology stocks. The FOMC meeting will also be in focus next week, which takes place on Wednesday the 26. 

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