Wealth Management — May 5, 2022
- The S&P 500 declined 3.6% on Thursday to close at 4,147. With the sell-off, the index is now down 13.0% year-to-date.
- Stocks reversed all of the prior session's gains on Thursday as outsized weakness in technology and growth stocks drove the broad indexes lower. While markets initially took Wednesday's FOMC statement as partially dovish - prompting both bonds and stocks to rally - that sentiment appeared to sour overnight as interest rates surged, stocks tumbled and volatility surged today. The Nasdaq 100 recorded the largest daily drawdown since September 2020, and 10-year Treasury yields breached 3% for the first time since 2018. Investors will look ahead to tomorrow's jobs report, where consensus expects 380,000 jobs added in the month of April and the unemployment rate to tick down to 3.5%.
- All 11 S&P 500 sectors were lower in the session, with Utilities (-1.1%) and Energy (-1.4%) outperforming the broad market while Information Technology (-4.9%) and Consumer Discretionary (-5.8%) lagged.
- As of the 4pm equity market close, Treasury yields were sharply higher across the curve with the 10-year yield closing at 3.04%. WTI oil prices were virtually flat at $108 per barrel while gold was modestly lower at $1,880 per ounce. The US Dollar Index rose nearly 1%.
- Monetary Policy: Yesterday, Fed Chair Powell announced that 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. Chair Powell stated that the FOMC unanimously voted to hike rates 50 basis-points yesterday and guided to "ongoing 50 basis-point increases in the target rate at the next couple of meetings." Additionally, reductions to the $9 trillion Federal Reserve balance sheet will begin on June 1 when $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). These reductions will then increase to $95 billion per month ($60 billion from Treasury securities and $35 billion from mortgage-backed securities). Currently, futures markets are pricing in 7.9, 25-basis-point hikes in the forward curve for the U.S., down from 10.2 hikes as of Tuesday's close.
- Q1 Earnings: First quarter earnings season continues as 83% of the S&P 500 constituents reported results thus far (415 companies) and 41 more are expected by the end of this week. For the S&P 500, 79.5% of the companies that reported beat 1Q22 earnings expectations, while blended earnings growth for the S&P 500 companies is running at 8.6% year-over-year, according to FactSet. During 1Q22 earnings calls, investors are closely monitoring forward guidance as well as the vulnerability of margins, earnings and valuations due to headwinds from higher input costs and deteriorating demand.
- Calendar: Nonfarm Payrolls, Unemployment Rate (5/6).
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 provides a year-end 2022 target of 4,400 for the S&P 500 while our bear case of 3,900 is still in play, especially as technicals and sentiment wrestle toward capitulation around the new regime. Our bull case of 5,000 corresponds to a view that rising rates and higher policy uncertainty demands lower price/earnings ratios, and this 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 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 being found 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.