Wealth Management — January 31, 2022
What Happened in the Markets?
- After an active January that saw large intra-day swings with an average daily trading range near 2%, the S&P 500 closed Monday 1.9% higher to 4,516. January saw just 7 higher daily closes for the S&P 500, the fewest number of trading day gains in a January since 1984. The S&P is now down 5.3% year to date.
- Investors continue to digest Federal Reserve Chair Powell's somewhat hawkish commentary during last Wednesday's FOMC meeting alongside the release of 4Q21 earnings results, economic data showing a pull-back in consumer spending, persistent COVID-related economic supply chain pressures, and geopolitical tensions.
- The Russell 1000 Growth index strongly outperformed the Russell 1000 Value index during the last trading day of the month, but Value still beat Growth by more than 615 basis points during January. The Nasdaq 100 rallied 3.3%, bouncing 6.6% from last Thursday's low, but still declined 8.5% for the month. The Russell 2000 Index gained 3.0% Monday and is now down 17.5% since its November 8th 52-week high.
- Every S&P 500 sector ended the day higher, with Consumer Discretionary (+3.8%) posting the highest gains. Information Technology (+2.7%), and Communication Services (+2.4%) were among the best outperformers today while Energy (+0.4%), Consumer Staples (+0.5%), and Health Care (+0.7%) lagged.
- WTI oil closed just above $88 after hitting a 52-week high of nearly $89 per barrel last Friday. Gold remained below $1,800 per ounce while Copper rose 0.7%. The 10-year Treasury yield closed slightly higher at 1.79%, while the US dollar edged lower. The CBOE Volatility Index (VIX) backed off below 25 after trading higher than 30 last week.
What to Watch Going Forward
- 4Q21 Earnings: So far 35% of the S&P 500 has reported earnings results with blended 4Q21 earnings growth running at 25.0% year over year. Of those companies that have reported, 79% have reported earnings above expectations while 18% have reported below. Estimated bottom-up earnings growth for 2022 rose a little to 8.5% from 8.4% on January 1st. We expect to hear from more than 110 companies by the end of this week. Fundamentals, growth, and guidance will be in focus as earnings season continues.
- FOMC: The Fed remains focused on maximum employment and price stability as inflation is currently well above the longer-term goal of 2%. Omicron's inflation risks are viewed as temporary, as the Fed expects inflation to decline throughout the year. Last Wednesday the stage was set for rate hikes to begin in March, and Chair Powell mentioned the potential for the Fed to hike at every meeting in 2022, with the path data-dependent. Chair Powell noted that the FOMC will revisit raising rates at the March meeting and asset purchases will be phased out into March. Securities will be allowed to roll off the balance sheet and reductions will occur after rate hikes.
- Economic Updates: ISM Manufacturing; JOLTS Job Openings (2/1), ADP Employment Change (2/2); ISM Services PMI, Durable Goods Orders (2/3), Nonfarm Payrolls / Unemployment rate (2/4).
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, 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.