Wealth Management — January 28, 2022
- US stocks traded higher on Friday as the S&P 500 rose 2.4% to close at 4,432. With today's rally, the index is now down 7.0% year to date.
- After three straight days of declines, US equities rallied on Friday. Equities have been volatile this week, as the VIX has closed above 30 in three of the five trading sessions, with markets reacting to continued Q421 earnings reports, Wednesday's FOMC meeting and a slew of economic data. On the former, a strong earnings report Thursday night from a mega cap US technology hardware company helped the technology sector surge on Friday, leading to broad market gains. The Nasdaq 100 gained 3.2%, its largest daily return since March of 2021.
- Ten of the 11 S&P 500 sectors were higher, with Information Technology (+4.3%) and Real Estate (+3.4%) outperforming the broad market, while cyclicals Materials (+0.6%) and Energy (-0.6%) lagged.
- Even with today's rally, 31.7% of the S&P 500 members are still down more than 20% from their 52-week intraday highs. Within the Nasdaq Composite, 44.6% of the index members are down over 50% from their 52-week intraday high levels.
- Treasury yields moved lower across the curve Friday, as the 10-year Treasury yield closed at 1.79% as of the 4pm equity market close. WTI oil traded higher to $87 per barrel while gold was lower, back below $1,800 per ounce. The US dollar, as measured by the US Dollar index, weakened modestly in the session.
- 4Q21 Earnings Season- So far 34% of the S&P 500 has reported earnings results, with 77% beating earnings estimates. The aggregate beat rate is currently coming in at 5%, while blended year over year earnings growth is running at 24%. Earnings will continue to be of focus as investors monitor company guidance relating to their management with the latest COVID-19 surge as well as continued supply chain/cost pressures. Nearly 25% of the S&P 500 market cap is expected to report next week.
- FOMC Meeting Signals Tighter Policy Ahead- On Wednesday, the Federal Reserve's statement reiterated their commitment to scaling back accommodation this year, with the first raise in the fed funds rate "soon to be appropriate", setting the stage for a March hike. Chair Powell also mentioned the potential for the Fed to hike at every meeting in 2022, but that the path of future monetary policy will be dependent on incoming labor market and inflation data. The Fed also mentioned that balance sheet purchases will end in March, while the reduction of the balance sheet could come soon after the first rate hike. Nonetheless, the Fed remains focused on maximum employment and price stability as inflation is currently well above their long term goal of 2%.
- Economic Data- ISM PMIs; JOLTS Job Openings (2/1), ADP Employment Change (2/2); ISM Services PMI, Durable Goods Orders (2/3), Nonfarm Payrolls / Unemployment rate (2/4)
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.