Wealth Management — March 15, 2022
- The S&P 500 gained 2.1% Tuesday to close at 4,263. With today's rally, the index is now down 10.6% year to date.
- US equities rallied for the first time in four trading sessions on Tuesday, reversing all of Monday's losses in the process. Today's rally came ahead of Wednesday's FOMC meeting, and was perhaps catalyzed by a sharp sell off in oil prices the past two sessions. Growth and technology stocks - the biggest laggards in recent weeks - outperformed on Tuesday; the Nasdaq 100 rose 3.2% after recently falling into bear market territory for the first time since March 2020 on Monday. Markets are widely anticipating a 25 basis point hike at tomorrow's FOMC meeting, with additional focus on the Fed's commentary regarding the pace of future rate hikes and the timing of balance sheet reductions.
- Ten of the 11 S&P 500 sectors closed the day higher with Information Technology (+3.4%) and Consumer Discretionary (+3.4%) outperforming the broad market, while Real Estate (+0.7%), and Energy (-3.7%) lagged.
- Interest rates were mixed across the curve, with 10-year Treasury yields at 2.15% as of the 4 p.m. equity market close. WTI oil closed down 7% to under $96 per barrel, while gold was also lower at $1,915 per ounce.
- Economic Data: The Empire Manufacturing index fell to negative 11.8 in the month of February, versus the consensus expectation of 6.1, and 3.1 for the prior month (January). US PPI came in below expectations on Tuesday, rising 0.8% month over month (versus 0.9% estimate) and up 0.2% ex Food and Energy compared to expectations of 0.6%.
- Monetary Policy: A 25bps rate hike is expected to be announced at Wednesday's FOMC meeting. During tomorrow's press conference, investors will be listening for signals from the central bank with regard to the amount and pace of future rate hikes in addition to information regarding the reduction in the balance sheet (quantitative tightening). Fed Chair Jerome Powell's recent speeches to Congress reiterated the Fed's monetary policy goals of maximum employment and price stability, also adding his support for a 25-basis-point rate hike at the next meeting. He noted that plans for balance sheet reductions will come sometime soon after the first rate hike. Additionally, Powell mentioned that the Fed will be able to remain nimble in adjusting future policy given elevated geopolitical tension dynamics and the risks to the outlook for economic growth, while also closely monitoring incoming data.
- Economic Calendar: Retail Sales and FOMC Meeting (3/16); Industrial Production and Housing Starts (3/17).
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 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 moving lower off the prior peak, 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.
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