The 1% Move Report

Wealth Management — September 13, 2022

• Following the US CPI report Tuesday morning, US equities deteriorated and rates moved higher across the curve. 
• By 4pm, the S&P 500 Index closed at 3,933, a 4.3% decline from Monday and the Nasdaq 100 ended the day 5.5% lower. This was the largest one-day dip since June 11 2020 for the S&P 500, and since March 16 2020 for the Nasdaq 100.
• Markets responded negatively following this morning's US Headline CPI report which showed inflation rose 8.3% YoY, above expectations for 8.0% YoY. Even though the report came in below the 8.5% YoY reading last month, much of the decline was driven by lower gas prices, with most other major categories ticking up in August vs July.
• Following this report, fixed income markets (according to Bloomberg) are pricing in a 100% chance of a 75 basis point hike and a 35% chance of a 100 basis-point hike at next week's Fed meeting. 
• For the S&P 500 Index, the pressure was broad-based as all but five of the index's constituents declined on the day and each of the 11 S&P 500 sectors ended the day lower. Communication Services (-5.6%) and IT (-5.4%) underperformed the most, while Energy (-2.5%) and Utilities (-2.7%) outperformed but still declined since the close of trading Monday. Year to date, the S&P 500 Index is down 17.1% while the Nasdaq 100 has fallen 26.3%.
• As of the 4pm equity market close, pressure was seen across all asset classes. The 10-year Treasury yield was higher at 3.42% and the 2-year yield rose to 3.75%. WTI oil remained near $87.5 per barrel while gold was lower at $1,703 per ounce. The US dollar gained 1.4% to 109.9.

• Monetary Policy: The message of Fed Chairman Jerome Powell's "Monetary Policy and Price Stability" speech at the economic policy symposium in Jackson Hole, Wyoming, explained that, while price stability will take some time, the FOMC is committed to lowering inflation to the two percent goal. The FOMC is "taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored." The committee "will keep at it until ... confident the job is done." Inflation readings have come down from the peak, but the FOMC requires additional data beyond one month to gain confidence of a potential path toward their 2% goal. Currently, fixed income markets are pricing in a 100% chance of a 75 basis point hike and a 35% chance of a 100 basis point hike following next week's FOMC meeting, (9/20 to 9/21). MS & Co. forecasts a 75-basis-point hike at next week's meeting, followed by an additional 50-basis-point hike in November as well as a 25-basis-point hike in December to a peak rate of 3.875%. Regarding the balance sheet reduction program, which doubled this month, Fed Chairman Powell previously communicated that the process to get back to equilibrium may take two to two-and-a-half years.
• Calendar: US Producer Price Index (9/14); Retail Sales, Industrial Production, Business Inventories (9/15); University of Michigan Consumer Sentiment (9/16).

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 2024E 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 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.