The 1% Move Report

Timely commentary on market performance whenever the S&P 500 changes more than 1% in a day.






Wealth Management — January 21, 2022

What Happened in the Markets?

  • US stocks traded lower on Friday as the S&P 500 declined 1.9% to close at 4,398. With the sell-off, the index is now down 7.7% year to date.  
  • US equities extended their losing streak into the weekend, as the S&P 500 fell for the fourth straight session. On a holiday shortened week, with markets closed on Monday in celebration of MLK day, the S&P 500 declined 5.7% while technology stocks continued their recent underperformance, as the Nasdaq 100 fell 7.5%. Recent weakness has coincided with markets digesting a hawkish Federal Reserve and a higher interest rate environment, while Q421 earnings has been in particular focus this week. Friday's sell off appeared to be magnified by a large cap media and streaming company missing subscriber estimates on Thursday afternoon, which weighed on related Communication Services stocks and the broad market. Q421 earnings will continue be the focal point as more than 30% of the S&P 500 market cap reports next week, while Wednesday's FOMC meeting will also be closely watched.   
  • Ten of the 11 S&P 500 sectors traded lower on Friday, with Consumer Staples (+0.02%) and Real Estate (-0.04%) outperforming the broader market, while Consumer Discretionary (-3.1%) and Communication Services (-3.9%) lagged. 
  • Rates were lower across the curve, with the 10-year Treasury yield falling to 1.76% as of the 4 p.m. equity market close. Gold was modestly lower on the day while WTI oil was also lower at just under $85 per barrel. The US dollar was modestly weaker on the trading session, as measured by the US Dollar Index.

Catalysts for Market Move

Equity markets traded sharply lower on Friday as the S&P 500 declined 1.9%. The index has sold off on every day of this holiday-shortened week, as markets were closed on Monday in celebration of MLK day. With the S&P 500 now having recorded three straight weeks of declines - the first time that has happened since September of 2020 - it appears the risk off sentiment that started off 2022 continues to linger. In recent weeks, investors have grappled with a surge in bond yields as the Federal Reserve takes on a path towards tighter monetary policy in 2022, in addition to the effects of the Omicron variant on the economic recovery. Long duration growth and technology stocks have bared the brunt of the move higher in Treasury yields, as the Nasdaq 100 entered correction territory on Thursday, and is now down 12.9% from its November 19 all-time closing high. In Friday's session however, the Communication Services sector was the largest underperformer as a large-cap media and streaming company reported a significant miss in their subscriber estimates. While rates are still over 20 basis point higher to start this year, on Friday rates were sharply lower across the curve while equity markets traded defensively as Consumer Staples was the only sector slightly higher. Q421 earnings will continue be in focus as over 30% of the S&P 500 market cap reports next week. The FOMC meeting will also be watched, which takes place on Wednesday the 26th.

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 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.

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