The 1% Move Report

Wealth Management — March 16, 2022

• The S&P 500 gained 2.2% Wednesday to close at 4,358. With today's rally, the index is now down 8.6% year to date. 
• US equities rallied for the second day in a row on Wednesday, with the Federal Reserve's second meeting of the year in focus. As expected, the Fed raised the federal funds target rate by 25 basis points, the first such rate hike from the central bank since December of 2018. US equities had rallied sharply in the morning ahead of the Fed announcement, though the major averages gave up their gains with the S&P 500 briefly trading into negative territory following the 2 p.m. FOMC announcement. However, markets quickly bounced back and the S&P 500 ended the session at its highs for the session. On the back of more hawkish commentary from the Fed, yields were sharply higher across the curve, though the move was more dramatic on the front-end driving curve flattening.
• Nine of the 11 S&P 500 sectors closed the day higher with Consumer Discretionary (+3.4%) and Information Technology (+3.3%) outperforming the broad market, while Utilities (-0.2%), and Energy (-0.4%) lagged.
• Interest rates were mixed across the curve, with 10-year Treasury yields rising to 2.16% as of the 4 p.m. equity market close. WTI oil closed lower at $95 per barrel, while gold was higher to $1,930 per ounce. The US Dollar weakened as measured by the US Dollar Index.

• Monetary Policy: The Federal Reserve met market expectations with Wednesday's meeting by raising the federal funds target rate by 25 basis points. However, there were significant revisions to the Summary of Economic Projections (SEP), with the Fed's 2022 core PCE forecast moving to 4.1% from the previous 2.7% December projection, while real GDP forecast was lower to 2.4% (from 4% previously). The median dot plot showed 7 hikes this year and a projection of 1.875% for the year-end 2022 funds rate, also in line with market expectations; MS & Co. Chief US Economist Ellen Zentner stated how there were seven policymakers that had their 2022 projections above the median 2022 year end dot of 1.875%, which leans hawkishly for the 2022 rate hike outlook. Regarding the balance sheet, the Fed stated they would look to reduce its size "at coming meetings." Markets took the Fed announcement in stride, with the S&P 500 shrugging off a more than 1% sell off intraday after the press release as the index ultimately finished at session highs. 
• Economic Data: February retail sales numbers were slightly below consensus on Wednesday, advancing 0.3% month over month versus 0.4% estimate, but farther below on the core reading (-0.4% versus 0.4% estimate). Consumer spending grew in 7/13 categories in the month of February, compared with 10/13 in January. While February growth missed, January retail sales were revised sharply higher and overall the report emphasizes the strong consumer demand in the first quarter of 2022, despite headwinds of sustained elevated inflation levels. 
• Economic Calendar: Industrial Production and Housing Starts (3/17); Leading Index (3/18).

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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