Wealth Management — July 28, 2022
- Equity markets built upon yesterday's strong rally with all three of the major averages gaining over 1% Thursday. The S&P 500 Index rose 1.2%, closing at 4,072. With the rally, the index is now down 14.6% year to date.
- US real GDP QoQ shrunk at an annual rate of 0.9% versus the consensus estimate of +0.4%, posting the second consecutive quarter of negative growth. The strength of the past two sessions has appeared to be linked to the market pricing a less aggressive federal funds rate path following Wednesday's FOMC meeting; as of now, fixed income markets are pricing 3.7 25 basis point hikes for the rest of 2022, down from 7.2 pre-FOMC. Consequently, Treasury yields across the curve sharply declined the past two sessions, helping bolster equity valuations.
- Q2 earnings season continues to march on, with mixed results this week acting as another lever for volatility in recent days.
- Ten of the 11 S&P 500 sectors closed higher Thursday. Real Estate (+3.7%) and Utilities (+3.5%) were the largest relative outperformers while Energy (+0.5%) and Communication Services (-0.7%) lagged.
- As of the 4pm equity market close, the 10-year Treasury yield declined to 2.68% and 2-year yields decreased to 2.87%. WTI oil was flat at $97 per barrel, while gold rose 1.2%. The US Dollar Index declined modestly.
- Q2 Earnings: Thus far, nearly 50% of the S&P 500's market cap (243 companies) has reported results, with 74% beating earnings forecasts and 60% surpassing expectations for revenues. Thus far this week guidance and 2Q earnings results have been better than anticipated for a number of technology companies. An additional 34 companies are expected to report by the end of the week. Energy company earnings are driving much of the growth, with S&P 500 2Q22 blended earnings growth currently at 6.4% (-3.0% excluding Energy). During company 2Q22 earnings calls, investors will be closely monitoring forward guidance as well as vulnerability of margins and earnings due to headwinds from slowing growth, higher input costs and deteriorating demand conditions.
- Monetary Policy: Yesterday the Federal Open Markets Committee (FOMC) announced their unanimous decision for a second consecutive 75 basis point rate hike. Additionally, Fed Chair Powell indicated that future rate decisions will be made meeting by meeting and "an usually large increase could be appropriate at the next meeting...(and it) could be appropriate to slow increases." MS & Co. economists forecast a 50 basis point hike at the September FOMC meeting. Regarding the balance sheet reduction program, which is anticipated to ramp through September, Fed Chair Powell communicated that the process to get back to equilibrium may take two to two and a half years.
- Economic Calendar: Chicago PMI, University of Michigan Consumer Sentiment, Employment Cost Index (7/29).
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 continued caution in the indices remains intact. Our June 2023 base case provides a target of 3,900 for the S&P 500. This scenario assumes earnings and revenue growth decelerates due to high cost pressures in a slowing growth environment. Our June 2023 bear case of 3,350 considers a slowdown in earnings growth rate, margin pressure, sticky inflation, and a recession. Our June 2023 bull case of 4,450 corresponds to a soft landing environment where earnings growth slows but remains positive, inflation decelerates, cost pressures ease, and confidence improves. This bull case forecast embeds an estimate of 17.9x forward June 2024 earnings. With earnings revisions moving lower off the prior peak, investors should focus on risk management through quality factor exposure, defensiveness with regard to interest rate sensitivity, and attention to stock-specific valuations. We are moving to a position of maximum diversification by sector and market cap, with interesting ideas in Energy, Industrials, Materials, Health Care, Consumer Services, Financials, Utilities and Staples. 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 for core investment grade, 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.
Consumer Price Index: Examines the weighted average of prices of a basket of consumer goods and services.
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.
University of Michigan Consumer Confidence Index: Measures three broad areas of consumer sentiment: personal finances, business conditions, and buying conditions.
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.