Wealth Management — June 9, 2022
- The S&P 500 declined 2.4% on Thursday to close at 4,018. With the sell-off, the index is now down 15.7% year to date.
- Stocks sold off sharply in the afternoon of Thursday's session to close lower for the second straight day. Inflation concerns remain top of mind for markets going into tomorrow's CPI release, where consensus expects an 8.3% YoY headline CPI report. The European Central Bank (ECB) was the latest central bank to provide hawkish commentary on Thursday, stating they would hike the Eurozone deposit rate in July by 25 basis points and by an additional unspecified amount in September.
- Every S&P 500 sector was lower, as Consumer Staples (-1.5%) and Consumer Discretionary (-2.0%) outperformed the broad market while Information Technology (-2.7%) and Communication Services (-2.8%) lagged.
- As of the 4pm equity market close, the 10-year Treasury yield rose to 3.05%. WTI oil declined to just above $121 per barrel. The US Dollar Index strengthened modestly in the session.
- Monetary Policy: The FOMC sees a path to a "softish landing" as the labor market and the financial conditions of households and businesses are strong enough to provide "a good chance to restore the economy without a recession." This path includes an expeditious move in policy rates. During the May meeting, the FOMC unanimously voted to hike rates 50 basis points and guided to "ongoing 50-basis-point increases in the target rate at the next couple of meetings." Additionally, Fed Chair Powell said that a hike of "75 basis-points is not something the committee is actively considering." Quantitative Tightening ("QT") began June 1. The reductions to the $9 trillion Federal Reserve balance sheet will occur within cap limits as $47.5 billion of securities will be removed each month for the next three months ($30 billion from Treasury securities and $17.5 billion from mortgage-backed securities). In September, the reductions will ramp to a maximum of $95 billion per month ($60 billion from Treasury securities and $35 billion from mortgage-backed securities). Currently, futures markets are pricing in 8.3, 25-basis-point hikes in the forward curve for the U.S., down from 10.2 hikes on May 3.
- Calendar: US CPI, University of Michigan Sentiment Index (6/10).
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.