Wealth Management — March 18, 2022
- The S&P 500 gained 1.2% Friday to close at 4,463. With today's rally, the index is now down 6.4% year to date.
- US equities traded higher for a fourth consecutive session with Technology and Consumer Discretionary stocks leading. The Nasdaq 100 finished the week up 8.4%, the largest weekly gain since November 2020. Several Federal Reserve Presidents provided hawkish commentary today following Wednesday's 25 basis point federal funds rate hike. Nonetheless, inflation and an environment for slower growth is materializing in the United States adding pressure to outlooks for revenue and margin expansion.
- Ten S&P 500 sectors closed the day higher with Information Technology (+2.2%) and Consumer Discretionary (+2.2%) outperforming the broad market, while Utilities (-0.9%), and Energy (+0.1%) lagged.
- U.S. Treasuries were weaker across the curve, with 10-year Treasury yields at 2.15% by the 4 p.m. equity market close. WTI oil closed higher to over $104 per barrel.
- Monetary Policy: This past Wednesday, the Federal Reserve actions mostly came in line with expectations, delivering the first rate hike since 2018 along with a projection of 1.9% for the Fed Funds rate by the end of 2022 and a median of 2.8% for the following two years. This suggests seven rate hikes (including the one just announced) could occur by the end of 2022. Fed Chair Powell noted that the timing and size of these hikes will not be determined until incoming data is reviewed and the outlook is assessed at each meeting. Additionally, the balance sheet reductions, which Powell expects to announce "at a coming meeting," maybe equivalent to another rate increase. This aligns with the Fed's recent stance that it will be more nimble regarding monetary policy actions and observe incoming data closely. MS & Co. Chief US Economist Ellen Zentner stated that 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.
- Geopolitics and COVID Updates: Some factories and public transit reopened in Shenzen following last week's increase in COVID infections, and China is identifying a path toward an easing of future COVID related restrictions. The situation between Russia and Ukraine remains fluid as new developments arise by the day.
- Economic Calendar: New Home Sales (3/23), Durable Goods (3/24), University of Michigan Consumer Sentiment (3/25).
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 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.
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