Wealth Management — May 9, 2022
- The S&P 500 declined 3.2% on Monday to close at 3,991, down 16.3% year-to-date. With today's sell-off, the S&P 500 is now at its lowest level since March of 2021.
- Markets extended recent losses on Monday as volatility on Wall Street continues. Sentiment remains depressed as headwinds persist from a hawkish Federal Reserve and elevated inflation. Selling was broad-based in the session, with ten of the 11 S&P 500 sectors declining and 85% of S&P 500 members trading lower; commodity prices also plummeted, led by WTI oil which fell nearly 7%. Markets will be keenly focused on inflation data this week, with CPI reporting Wednesday and PPI Thursday.
- Ten of the 11 S&P 500 sectors were lower in the session, with Consumer Staples (+0.1%) and Utilities (-0.8%) outperforming the broad market while Real Estate (-4.6%) and Energy (-8.3%) lagged.
- As of the 4pm equity market close, the 10-year Treasury yield fell to 3.03%. WTI oil prices plunged, down 6.8% to $102 per barrel, while gold declined 1.5%, close to $1,850 per ounce.
- Monetary Policy: Last week, 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 last week and guided to "ongoing 50 basis-point increases in the target rate at the next couple of meetings." Additionally, 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. These 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 7.4, 25-basis-point hikes in the forward curve for the U.S., down from 10.2 hikes as of last Tuesday's close.
- S&P 500 Earnings: First quarter earnings season continues as 88% of the S&P 500 constituents reported results thus far (440 companies) and 21 more are expected by the end of next week. For the S&P 500, 77% of the companies that reported beat 1Q22 earnings expectations, while blended 1Q22 earnings growth for the S&P 500 companies is running at 9.1% year-over-year, according to FactSet. During 1Q22 earnings calls, investors have been monitoring forward guidance as well as the vulnerability of margins, earnings and valuations due to headwinds from higher input costs and deteriorating demand.
- Calendar: NFIB Survey (5/10); CPI (5/11); PPI (5/12); UMich. Sentiment (5/13).
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.
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