Wealth Management — March 1, 2022
- The S&P 500 traded lower on Tuesday as the index declined 1.6% to close at 4,306. With today's sell off, the index is now down 9.7% year-to-date.
- US equities declined for the second straight session as geopolitical concerns continue to weigh on markets. Recent headlines suggest a continued escalation in hostilities as the Russian invasion of Ukraine continues and this likely has weighed on sentiment so far this week. Underpinning the geopolitical headwinds, WTI oil spiked to over $100 per barrel for the first time since 2014, even as the International Energy Agency (IEA) agreed to a coordinated release of reserves, putting inflation fears back into the forefront. Having said that, interest rates were sharply lower across the curve, as 10-year Treasury yields have dropped more than 20 basis points in the last two trading sessions. Despite the risk off sentiment, economic data surprised to the upside with the ISM Manufacturing release coming in above consensus estimates.
- Ten of the 11 S&P 500 sectors were lower on the session with Energy (+1.0%) the only sector positive, while Materials (-2.3%) and Financials (-3.7%) lagged.
- Interest rates were lower across the curve, with the 10-year Treasury yield at 1.72% as of the 4 p.m. equity market close. WTI oil was sharply higher to over $104 per barrel, while gold was also higher to almost $1,950 per ounce. The US dollar modestly strengthened as measured by the US Dollar Index.
- Geopolitical Tensions: The situation between Russia and Ukraine continues to remain fluid, with new sanctions over the weekend causing another leg higher in commodity prices, particularly oil, while equity markets have sold off after a strong end to last week. In addition to headlines coming out of Ukraine, expect markets to pay close attention to the US President's State of the Union Address Tuesday night, where the Russia/Ukraine conflict is likely to be a focus. Expect volatility to remain elevated in coming weeks as new developments continue to surface.
- 4Q21 Earnings: Earnings season is almost over with 97% of the S&P 500 already having reported results. S&P 500 recording 31% blended 4Q21 earnings growth year over year (y/y), while 76% percent of companies have beaten earnings expectations with an aggregate beat rate of 6.1%, which is above the median rate of 5.1% since 2008. While results have been strong, forward guidance has been mixed with the ratio of negative to positive earnings guidance making multi-year highs.
- Monetary Policy: Markets continue to gauge the timing and scale of future U.S. rate hikes and balance sheet adjustments that are anticipated to begin following the next Fed meeting on March 15-16. While geopolitical uncertainty is currently affecting market sentiment and short-term conditions, the Federal Reserve will continue to monitor incoming inflation and economic data in the coming months to help guide future monetary policy actions. This week, Federal Reserve Chair Jerome Powell will testify in front of the House (Wednesday) and Senate (Thursday) where he will likely be asked to elaborate on the Fed's plans in the coming months. With the latest move in fixed income markets, the number of hikes priced into futures markets for 2022 has fallen from over 6 to currently 5.
- Economic Calendar: ADP Employment Change (3/2); Jobless Claims, ISM Services, Durable Goods Orders (3/3); Nonfarm Payrolls, Unemployment Rate (3/4).
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 US dollar against a subset of the broad index currencies that circulate widely outside the US.