Wealth Management — October 6, 2022
- The S&P 500 Index declined 1.0% Thursday to close at 3,745. Eighty-three percent of the S&P 500's constituents fell on the day. With the sell-off, the index is now down 21.4% year-to-date.
- While equity markets started off this week with the largest two-day rally since April of 2020, equities turned lower the past two sessions. Today, jobless claims came in above consensus expectations and the US Dollar Index rose nearly 1%. In addition, several Federal Reserve members reiterated the higher for longer mantra when it comes to higher interest rates. Tomorrow's jobs report is anticipated to show 260,000 jobs were added in the month of September, and an unemployment rate of 3.7%.
- Next week Q3 earnings season will kick off with several large cap banks scheduled to release results.
- Ten of the 11 S&P 500 sectors declined, with Energy (+1.8%) and Communication Services (-0.7%) the relative outperformers, while Real Estate (-3.2%) and Utilities (-3.3%) underperformed.
- As of the 4pm equity market close, the 10-year and the 2-year Treasury yields rose to 3.82% and 4.24%, respectively.
- 3Q22 Earnings Preview: A number of Financial companies are set to kick-off 3Q22 earnings season next week. For the S&P 500, bottom-up, 3Q22 earnings growth is anticipated to be 4.5% y/y (-2.0% ex-Energy), with five of the 11 sectors anticipating y/y growth (including +118%y/y growth for the Energy sector), according to I/B/E/S data from Refinitiv. During company 3Q22 earnings calls, investors will be monitoring forward guidance as well as the impact of elevated inflation, higher rates, and slowing growth on margins, earnings, and valuations.
- Monetary Policy: Following the September FOMC meeting, Fed Chair Powell announced a 75-basis-point hike and reiterated that the committee "will keep at it until ... confident the job is done." MS & Co.'s Ellen Zentner expects a 75-basis-point hike in November, 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-basis-points may occur. While the balance sheet reduction program doubled earlier this month, during this week's meeting, Fed Chair Powell indicated that MBS sales are not expected any time soon.
- Economic Data Today:
- Initial Jobless Claims - Rose back above 200,000 at 219,000 for the prior week, higher than the 204,000 consensus forecast.
- Calendar: Employment Situation (10/7).
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 in the indices remains intact. Corporate earnings revisions are moving lower, and valuations remain rich, especially relative to the 10-year real interest rate. We recommend that investors focus on risk management through quality cash flows, defensiveness with regard to interest rate sensitivity, and attention to stock-specific valuations. Bear market rallies should be used for rebalancing and tax-loss harvesting. 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 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 rising real rates, falling operating leverage and the strong US dollar.
For US equities, our June 2023 S&P 500 base case provides a target of 3,900. 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 2024E earnings.
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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