The 1% Move Report

Timely commentary on market performance whenever the S&P 500 changes more than 1% in a day.






Wealth Management — March 31, 2022

Source: Bloomberg, Morgan Stanley Wealth Management Global Investment Office, prices as of 3/31/22.

What Happened in the Markets?

  • The S&P 500 declined 1.6% on Thursday to close at 4,530. With the sell off, the index is now down 4.9% year to date.
  • US stocks fell for the second consecutive day on Thursday as markets continue to navigate developments in geopolitics and mixed economic data. The most recent reports showed that peace talks between Russia and Ukraine had no "breakthroughs," which could have contributed to downbeat sentiment the past two trading sessions. The White House Administration also announced a plan to coordinate a large release of US oil reserves on Thursday, which sent oil prices sharply lower on the day. With Thursday's close, the S&P 500 recorded its worst quarter since 1Q20 down 4.9%, while the US aggregate bond index had the lowest quarterly return since 1980, trading 6.0% lower. 
  • All 11 S&P 500 sectors were lower, with Utilities (-0.2%) outperforming the broad market while Communication Services (-2.0%) and Financials (-2.3%) lagged.
  • Treasury yields were lower across the curve as the 10-year Treasury yield fell to 2.32% as of the 4pm equity market close. WTI oil was 6% lower to $101 per barrel while gold was higher to $1,940 per ounce.

What to Watch Going Forward

  • Monetary Policy: At its March meeting, the Fed delivered its 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," may be 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. Since then, Federal Reserve Presidents have provided commentary indicating that 50bps hikes are possible if the data calls for it. MS & Co. Chief US Economist Ellen Zentner now expects two 50 basis point hikes at both the May and June meetings, with the market currently pricing a 75% of a 50 basis point hike in May and 71% chance for June. 
  • March Payrolls: March Nonfarm payrolls will be released Friday morning; MS & Co. expects 550,000 jobs added versus the consensus estimate of 490,000; MS & Co. economists also expect the unemployment rate to tick down to 3.6% versus consensus of 3.7%. 
  • Economic Calendar: Nonfarm Payrolls and Unemployment Rate, ISM Manufacturing, Construction Spending (4/1).

The Global Investment Committee’s Outlook

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, investors should focus toward risk management through quality factor exposure, defensiveness with regards to interest rate sensitivity, and attention to stock specific valuations. We are moving to a position of maximum diversification by sector and market cap, with interesting ideas being found in energy, industrials, materials, healthcare, consumer services, financials, utilities and staples. 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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