Wealth Management — September 21, 2022
- Following this afternoon's announcement of a third-consecutive 75-basis-point rate increase, markets experienced a choppy session as investors digested Fed Chair Powell's comments and the Federal Open Market Committee's (FOMC) projections.
- The S&P 500 Index sold off sharply in the last hour of Wednesday's trading session to close at 3,790, down 1.7%. Meanwhile, the 10-Year moved lower to 3.51% and the 2-Year rose to 4.03%, the highest since 2007.
- The Federal Open Market Committee (FOMC) continues to strive to alleviate inflationary pressures by bringing supply and demand more in balance, with a goal of 2% inflation in mind. Nonetheless, today, Fed Chair Powell noted that below trend growth will continue at least through 2023 and could lead to higher unemployment. For inflation to moderate, rate increases are necessary for prices and wages to come down.
- All 11 S&P 500 sectors declined, with Consumer Discretionary (-2.4%) and Communication Services (-2.3%) the relative underperformers, while Consumer Staples (-0.4%) and Industrials (-1.3%) outperformed.
- Gold rose to $1,674 per ounce while WTI oil fell to $83 per barrel. The US Dollar Index was higher.
- Monetary Policy: Fed Chair Powell announced a 75-basis-point hike following this week's FOMC's rate meetings and reiterated that the committee "will keep at it until ... confident the job is done." The committee's "Summary of Economic Projections" showed that members anticipate that monetary policy will continue to be restrictive for some time as expectations for the fed funds rate remain well above the 2.0% target rate at least until 2025. The committee's median fed funds rate projections are for 4.4% in 2022, 4.6% in 2023, 3.9% in 2024, and 2.9% in 2025. Regarding the balance sheet reduction program, Fed Chairman Powell previously indicated that the run-off of the mortgage backed securities (MBS) portion would occur once the run-off is well underway. While the balance sheet reduction program doubled earlier this month, during today's meeting Fed Chair Powell indicated that MBS sales are not expected any time soon. Currently, fixed income markets are pricing in a 75% chance of a 75-basis-point hike at the November meeting and an 94% chance of a 50-basis-point hike following the meeting in December.
- Calendar: Leading Index (9/22); S&P Global PMIs (9/23).
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.