Wealth Management — March 9, 2022
- The S&P 500 rallied 2.6% Wednesday to close at 4,278. With today’s gain, the index is now down 10.2% year to date. WTI oil dropped more than 11.2% to $110 per barrel.
- Markets continue to react to developing news surrounding geopolitical tensions, sanctions, supply shocks, and inflation concerns. Today's calls from the United Arab Emirates encouraging OPEC to boost oil production followed President Biden's ban on Russia oil imports yesterday.
- Nine of the 11 S&P 500 sectors were higher with Information Technology (+4.0%), Financials (+3.6%), and Communication Services (+3.5%) outperforming, while Utilities (-0.8%) and Energy (-3.2%) lagged.
- Tomorrow's CPI report for February will be closely watched as a key read on inflation ahead of next week's FOMC meeting.
- Geopolitical Tensions: The situation between Russia and Ukraine remains fluid as new developments arise by the day. Russia and Ukraine foreign ministers are expected to hold a third round of talks this Thursday. Wednesday's rally may have been driven in part by hopes that perhaps some de-escalation in the conflict could result from the latest announced talks.
- 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.
- Economic Calendar: 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.