Wealth Management — November 28, 2022
What Happened in the Markets?
- The S&P 500 declined 1.5% Monday to close at 3,964. With the sell-off, the index has now fallen 16.8% year-to-date.
- All 11 S&P 500 sectors fell Monday as Consumer Staples (-0.3%) and Consumer Discretionary (-0.6%) outperformed while Energy (-2.7%) and Real Estate (-2.8%) lagged.
- Last week the S&P 500 closed above 4,000 for the first time since mid-September. However, on Monday downside catalysts emerged, including unrest caused by COVID protests in China, and hawkish comments from Federal Reserve Presidents Bullard and Williams. The remarks precede Fed Chair Powell's speech this coming Wednesday where it is expected he will emphasize his intent to continue to use the Fed's monetary tools to fight inflationary pressures. His speech will come before the November jobs report, which is scheduled to be released on Friday and will provide insight into labor market dynamics.
- By the 4 pm equity market close, WTI oil reversed an early session decline to finish near $77 per barrel. The 10-year US Treasury yield rose to 3.69% while the 2-year Treasury yield moved to 4.45%. The US Dollar Index increased modestly.
What to Watch Going Forward
- Monetary Policy: The next FOMC meeting is December 13-14, yet Fed Chair Powell is scheduled to speak on the "Economic Outlook, Inflation, and the Labor Market" to the Brookings Institution in Washington, D.C. this Wednesday. This is before the FOMC goes into a quiet period. Following this month's November FOMC meeting, Fed Chair Powell announced a fourth consecutive 75-basis-point (bp) hike and reiterated that "there is still a way to go to get to a sufficiently restrictive level of monetary policy" that will allow for inflation to return to 2% over time. Fed Chair Powell emphasized that the discussion on how long to keep policy restrictive is most important and that it is premature to think about a pause in rate hikes. With core services inflation still rising and goods inflation higher than the Fed anticipated at this point in time, the clarity on when inflation will moderate sustainably is not apparent. During the Q&A session, Fed Chair Powell noted that "a soft landing is still possible, although the window has narrowed." MS & Co.'s Ellen Zentner expects a 50-basis-point hike in December, and a 25-basis-point hike in January 2023, to a terminal rate of 4.625% in January. Additionally, she anticipates that rates will remain steady at the implied 4.625% level until December 2023 when a first rate cut of 25 bp may occur. Odds of a 50 bp hike at the December FOMC meeting are 100% while odds of a 75 bp hike are 16%, according to Bloomberg.
US Economic Releases
- 11/29: FHFC House Price Index MoM, Conference Board Consumer Confidence
- 11/30: ADP Employment Change, Pending Home Sales, JOLTS Job Openings
- 12/1: PCE Deflator, ISM Manufacturing, Jobless Claims
- 12/2: Employment Situation
The Global Investment Committee’s Outlook
With the Fed responding to 40-year highs in inflation through both rate hikes and balance sheet run-off in 2022, the GIC’s call for continued caution remains intact. Corporate earnings revisions have moved lower over the course of the year, suggesting downside to forward earnings growth. We recommend investors focus on risk management through quality cash flows, defensiveness, and attention to stock-specific valuations. We suggest rebalancing portfolios and tax-loss harvesting during bear market rallies. In fixed income, the challenge is two-fold: generating sufficient income, while also preserving capital, given the potential for higher yields amid ongoing inflation. This requires diversified and active exposure, with our preference for core investment grade fixed income and dividend-paying stocks. Consider revisiting positioning in long-duration/growth equities, where there may not be adequate compensation for the risks of higher real rates, falling operating leverage and the strong US dollar.
For US equities, the US Equity Strategy team sees the potential for further equity downside in the early part of 2023, given their base-case expectations of $195 for 2023E earnings, well below current consensus levels. Their 2023E S&P 500 base case provides a target of 3,900, based on 2024E earnings of $241. This scenario assumes that nominal top-line growth slows to the low single digits and that margins contract. Their 2023E bear case of 3,500 considers a severe earnings recession, margin pressure and a contraction of EPS growth. Their 2023E bull case of 4,200 corresponds to a mid-single-digit top-line growth rate and limited margin compression. This bull case forecast embeds an estimate of 16.7x MS & Co.'s forward 2024E earnings of $251.
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.