Wealth Management — June 24, 2022
- The S&P 500 Index rallied sharply on Friday to close up 3.1% to 3,912. With the gains, the index is still down 17.9% year to date.
- US stocks rose for the fourth time in the past five sessions on Friday. Markets staged a rebound this week as the S&P 500 gained 6.5%, reclaiming all of the prior week's losses. Perhaps part of the rally was catalyzed by month-end rebalancing, as equity indexes were down double digits in the month of June going into Tuesday's session. On Wednesday and Thursday, Federal Reserve Chairman Jerome Powell spoke to the Senate Banking Committee about the economy and reiterated that the Federal Open Market Committee (FOMC) "anticipate(s) ongoing rate increases will be appropriate" so that US inflation may return to the Fed's 2.0% goal. However, he noted that a "soft landing" could be "very challenging" as the Fed is projected to hike short-term interest rates above the neutral rate.
- While equities posted strong gains multiple days this week, commodities were more mixed. Industrial metals, which tend to be more sensitive to economic growth prospects, suffered steep declines on the week; in particular, copper closed the week down 7.0%.
- All 11 S&P 500 sectors closed higher Friday, as Materials (+4.0%) and Communication Services (+3.9%) outperformed the broad market while Health Care (+1.6%) and Energy (+1.5%) lagged.
- As of the 4pm equity market close, the 10-year Treasury yield rose to 3.13%. WTI oil rose 3% to just above $107 per barrel. The US Dollar Index weakened in the session.
- Monetary Policy: Last week, the Federal Reserve met expectations by raising the Fed Funds rate by 75 basis points to a range of 1.50% - 1.75%, the first such move since 1994. Chairman Jerome Powell cited continued inflation pressures including the May CPI report, which showed headline inflation was the highest in 42-years, as well as the University of Michigan survey which noted that consumer sentiment met an all-time low. The Chair also indicated that before the FOMC determines the speed at which the rate increases will progress going forward (including the potential for a 50 or 75 basis point hike in July), the committee will focus on incoming data and look for compelling evidence of a sequential decline in inflation readings. MS & Co. economists believe that Fed hikes will be front-loaded, expecting an additional 75 basis point hike in July and a peak rate of 3.625% by year-end 2022. The FOMC continues to target 2% inflation longer term, with projections of 5.2% for 2022, 2.6% for 2023, and 2.2% in 2024.
- Calendar: Durable Goods Orders, Pending Home Sales (6/27); FHFA House Price Index MoM, Conf. Board Consumer Confidence (6/28); Personal Income, Jobless Claims (6/30); ISM Manufacturing (7/1).
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.
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.