Wealth Management — May 23, 2022
- The S&P 500 rallied 1.9% on Monday to close at 3,974. With the gains, the index is now down 16.6% year to date.
- Stocks rebounded Monday after recording a seventh consecutive week of declines Friday. The White House administration noted that tariffs imposed on China by the prior administration could be reconsidered, which appeared to help fuel risk-on sentiment today. Cyclical stocks outperformed with Financials and Energy the strongest sectors on the day, and interest rates rose across the curve. With volatility continuing in recent weeks and Q1 earnings season at its tail-end, markets will focus on economic updates this week as well as Wednesday's FOMC minutes, which could provide a glimpse of how policymakers are thinking about the future path for monetary policy.
- All 11 S&P 500 sectors were higher in the session, with Financials (+3.2%) and Energy (+2.7%) outperforming the broad market while Health Care (+0.8%) and Consumer Discretionary (+0.6%) lagged.
- As of the 4pm equity market close, the 10-year Treasury yield rose to 2.86%. WTI oil prices were flat at $110 per barrel, while the US Dollar Index declined.
- Monetary Policy: The FOMC sees a path to a "softish landing" as the labor market and the financial conditions of households and businesses are strong enough to provide "a good chance to restore the economy without a recession." This path includes an expeditious move in policy rates. During the May meeting, the FOMC unanimously voted to hike rates 50 basis points and guided to "ongoing 50-basis-point increases in the target rate at the next couple of meetings." Additionally, Fed Chair Powell said that a hike of "75 basis-points is not something the committee is actively considering." Quantitative Tightening ("QT") is set to begin June 1. The reductions to the $9 trillion Federal Reserve balance sheet will occur within cap limits as $47.5 billion of securities will be removed each month for the next three months ($30 billion from Treasury securities and $17.5 billion from mortgage-backed securities). In September, the reductions will ramp to a maximum of $95 billion per month ($60 billion from Treasury securities and $35 billion from mortgage-backed securities). Currently, futures markets are pricing in 7.8, 25-basis-point hikes in the forward curve for the U.S., down from 10.2 hikes on May 3.
- Calendar: S&P Global US Composite PMI, US New Home Sales (5/24); US Durable Goods Orders, FOMC Meeting Minutes (5/25); Jobless claims, US Pending Home Sales (5/26); US Wholesale Inventories, US Personal Income and Spending (5/27).
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 June 2023 base case provides a target of 3,900 for the S&P 500. This scenario assumes earnings and revenue growth decelerates due to high cost pressures in a slowing growth environment. Our June 2023 bear case of 3,350 considers a slowdown in earnings growth rate, margin pressure, sticky inflation, and a recession. Our June 2023 bull case of 4,450 corresponds to a soft landing environment where earnings growth slows but remains positive, inflation decelerates, cost pressures ease, and confidence improves. This bull case forecast embeds an estimate of 17.9x forward June 2024 earnings. With earnings revisions moving lower off the prior peak, investors should focus on risk management through quality factor exposure, defensiveness with regard 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 in Energy, Industrials, Materials, Health Care, 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 for 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.