Wealth Management — January 25, 2022
- US stocks had another rollercoaster trading day Tuesday. A morning sell-off sent the S&P 500 down nearly 3% at its lowest point intraday, before a mid-session rally saw the index gain back all of its losses only to give way to a late session slide that left the index to close down 1.2%. In the first 16 trading days of the year the S&P 500 has posted 11 declines. The index is now down 8.6% year to date.
- The S&P 500 Energy (+4.0%) and Financials (+0.5%) sectors posted gains vs the prior trading day. Out of the remaining nine S&P 500 sectors that declined on Tuesday, the worst performers were Communication Services (-2.2%) and Information Technology (-2.3%).
- Underscoring the extent of recent weakness in markets, as of Tuesday's close, 30% of the S&P 500 constituents have posted declines greater than 20% versus their 52-week intraday highs. Of particular note, just over half of the constituents within each of the Communication Services, Consumer Discretionary and Information Technology sectors are down more than 20% vs their 52-week intraday highs.
- The Russell 1000 Value (-4.0% year-to-date) continued to outperform the Russell 1000 Growth (-13.6% year-to-date) on Tuesday. The Nasdaq 100 closed down 2.5% Tuesday (-15.6% since its November 22nd intraday high). The CBOE Volatility Index closed above 30 for the first time since the beginning of December.
- As of the 4 pm equity market close, WTI oil rallied 2.5%, moving just above $85 per barrel. Gold was modestly higher on the day, and the 10-year Treasury yield rose to 1.78%, while the US dollar remained flat.
Markets have sold off in recent weeks as investors have grappled with a surge in bond yields, geopolitical tensions, and continued COVID related pressures on economic data and the recovery. With the Federal Reserve's recent hawkish pivot, investors will be closely watching tomorrow's FOMC meeting for signals from the central bank with regards to its approach for monetary policy tightening in the months ahead. Fundamentals will also be in focus as 4Q21 earnings season continues; just over 100 companies release 4Q21 earnings this week (approximately 34% of the S&P 500 market cap). Wednesday and Thursday will be the heaviest days of earnings reports this week, with more than 35 S&P 500 companies reporting each day. Thus far this earnings season, five sectors have seen estimate revisions trend to the downside.
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.