The 1% Move Report

Timely commentary on market performance whenever the S&P 500 changes more than 1% in a day.






Wealth Management — September 20, 2022

Source: Bloomberg, Morgan Stanley Wealth Management Global Investment Office. Prices as of 9/20/22.

What Happened in the Markets?

  • The S&P 500 Index declined 1.1% Tuesday to close at 3,856. With the sell-off, the index is now down 19.1% year to date.
  • Both Treasury bonds and equities fell in tandem on Tuesday as markets mull additional corporate pre-announcements of slowing global demand and supply chain issues alongside the continuation of elevated inflation. Investors anticipate Fed Chair Powell will announce a 75 basis point rate increase following tomorrow's FOMC meeting. A third straight 75 basis point hike will be the first of its kind in modern history. 
  • As inflationary pressures remain elevated, we believe markets are apt to hear additional announcements of slowing growth and higher costs hits to corporate earnings and valuations as the third quarter unfolds. 
  • All 11 S&P 500 sectors declined, with Information Technology (-0.5%) and Consumer Staples (-0.5%) the relative outperformers, while Materials (-1.9%) and Real Estate (-2.6%) lagged. 
  • As of the 4pm equity market close, two-year Treasury yields rose to 3.96%, the highest since 2007, while 10-year Treasury rates climbed to levels not seen since 2011. Gold declined to $1,660 per ounce while WTI oil fell to below $85 per barrel. The US Dollar Index was modestly higher.

What to Watch Going Forward

  • Monetary Policy: Currently, fixed income markets are pricing in a 100% chance of a 75 basis point hike and an 18% chance of a 100 basis point hike following the FOMC meeting tomorrow. MS & Co.'s US Economists also forecast a 75-basis-point hike at this week's meeting, followed by an additional 50-basis-point hike in November as well as a 25-basis-point hike in December. This brings the peak fed funds rate to 4.1% by the end of 2023. It is not until 2024 that MS & Co. expects rate cuts to begin. 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." 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: Existing Home Sales, FOMC Meeting (9/21); Leading Index (9/22); S&P Global PMIs (9/23). 

The Global Investment Committee’s Outlook

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.

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