The 1% Move Report

Wealth Management — March 7, 2022

• The S&P 500 declined 3.0% Monday to close at 4,201. With today's sell off, the index is now down 11.9% year to date.
• Stocks continued last week's weakness as the sell off deepened on Monday. Elevated geopolitical tensions have remained the main driver behind the downbeat sentiment of late, with most recent reports focused on the potential for the United States to ban Russian oil imports. While stocks declined on Monday, WTI oil prices reached as high as $130 this morning before closing at $120 per barrel, still rallying more than 3% on the day. Despite the large sell off in equities, interest rates were higher across the curve, with the yield curve flattening. Markets will focus on the February CPI report on Thursday, which will be the last inflation print ahead of next week's FOMC meeting.     
• Nine of the 11 S&P 500 sectors were lower, with Energy (+1.6%) and Utilities (+1.3%) outperforming, while Communication Services (-3.7%) and Consumer Discretionary (-4.8%) lagged. 
• Interest rates were higher across the curve, with 10-year Treasury yields closing at 1.78% as of the 4 p.m. equity market close. WTI oil closed up more than 3% to $120 per barrel, while gold nearly reached $2,000 per ounce for the first time since August 2020, up 1.4%. The U.S. dollar strengthened as measured by the US Dollar Index.
• The Nasdaq 100 fell 3.7% and the Russell 2000 dipped 2.5%. The CBOE Volatility Index (VIX) closed higher at 36.

• Geopolitical Tensions: The situation between Russia and Ukraine remains fluid as new developments arise by the day. In recent news, the United States announced potential efforts to ban Russian oil imports, which sparked a resumption in the rally in oil prices. Russia and Ukraine foreign ministers are expected to hold a third round of talks this Thursday, though markets appear to be pricing an environment with continued escalation risk. Equity markets may also be reacting negatively to the latest surge in commodity prices, as higher input prices could lead to potential profit margin pressures.  
• Monetary Policy: Last week, Fed Chair Jerome Powell spoke with both the Senate and House of Representatives about the state of the economy and monetary policy. The Fed Chair reiterated the Fed's intent to hike interest rates at this month's meeting, with plans for balance sheet reductions sometime soon after the first rate hike. Powell also 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. Markets will be focusing on Thursday's February CPI print ahead of next week's FOMC meeting, with consensus expecting 7.9% YoY.
• Economic Calendar: NFIB Small Business Optimism, (3/8); CPI, Jobless Claims (3/10); U. of Mich. Sentiment (3/11).

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.