Wealth Management — March 2, 2022
- The S&P 500 traded 1.9% higher Wednesday to close at 4,387. With today's positive change, the index is now down 8.0% year-to-date.
- US equities recovered all of this week's losses during the session even as geopolitical concerns weigh on markets following Russia's invasion of Ukraine. Chairman Jerome Powell's comments at the House Financial Services Committee meeting restated monetary policy goals of maximum employment and price stability and he added his support for a 25-basis point rate hike this month. Additionally, during the Q&A session, Chair Powell indicated that he believes the US financial system is strong enough to withstand potential economic fall-out from war, with U.S. bank capital levels at multi decade highs. Underpinning the geopolitical headwinds, WTI oil spiked to over $111 per barrel, even as the International Energy Agency (IEA) agreed to a coordinated release of reserves on Tuesday, putting inflation fears back into the forefront.
- Each of the 11 S&P 500 sectors were higher on the session with Financials (+2.6%), Materials (+2.2%), Energy (+2.2%), and Industrials (+2.2%) providing the largest gains. Communication Services (+0.7%) and Consumer Staples (+1.0%) underperformed but also provided gains versus Tuesday.
- Interest rates were higher across the curve, with the 10-year Treasury yield at 1.90% and the 2-year Treasury yield at 1.53% as of the 4 p.m. equity market close.
- Monetary Policy: On Wednesday, at the House Financial Services committee meeting, Federal Reserve Chair Jerome Powell noted that it is too soon to tell how geopolitical turmoil and sanctions will affect the economy. Chair Powell signaled his support for a 25 basis-point rate hike at the FOMC meeting this month and said that plans to reduce the balance sheet will be reviewed during the meeting and finalized at some point after the increase in rates has commenced. The Federal Reserve will continue to monitor inflation and economic data in the coming months to help guide future monetary policy actions and may decide to move more than 25 basis points at a meeting or following multiple meetings. With regards to the market moves following the announcement of future rate increases, Chair Powell commented that he believes the market is reacting appropriately and the Fed is committed to achieving price stability. Chair Powell testifies in front of the Senate (Thursday). With the latest move in fixed income markets, the number of hikes priced into futures markets for 2022 has fallen from 6.6 to 5.8 .
- Geopolitical Tensions: The situation between Russia and Ukraine remains fluid as sanctions and counter sanctions led to inflation fears with higher commodity prices, particularly oil.
- Economic Calendar: 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 17US dollar against a subset of the broad index currencies that circulate widely outside the US.