Wealth Management — September 7, 2022
What Happened in the Markets?
- The S&P 500 Index rose 1.8% Wednesday to close at 3,980. With the gains, the index is now down 16.5% year to date. Ninety-five percent of the index's constituents traded higher.
- The S&P 500 Index rallied for just the second time in the past eight trading sessions today. It appeared equities experienced a reprieve from the fixed income and currency markets, as interest rates were lower across the curve and the US Dollar Index fell from 20 year highs. This is contrary from recent market action, as 2-year Treasury yields reached the highest levels since 2008 last week. Oil also continued its fall Wednesday, trading to January 2022 levels.
- Ten of the 11 S&P 500 sectors ended the day higher. Utilities (+3.1%) and Consumer Discretionary (+3.1%) outperformed, while Information Technology (+1.6%) and Energy (-1.2%) lagged.
- As of the 4pm equity market close, the 10-year Treasury yield was down to 3.26% and the 2-year yield fell to 3.44%. WTI oil closed 5% lower at $82 per barrel while gold was higher at $1,715 per ounce.
What to Watch Going Forward
- 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. Following Fed Chairman Powell's comments at the Jackson Hole symposium, MS & Co. economists see an increased risk for a 75-basis-point hike at the September FOMC meeting. Currently, fixed income markets are pricing in a 75% chance of a 75 basis point hike at the September meeting. Nonetheless, the MS & Co. forecast remains a 50-basis-point hike at that 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 3.625%. Regarding the balance sheet reduction program, which is anticipated to ramp through September, Fed Chairman Powell previously communicated that the process to get back to equilibrium may take two to two-and-a-half years.
- Calendar: Jobless Claims, Consumer Credit (9/8); Householder Change in Net Worth (9/9).
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.