Wealth Management — March 10, 2023
- The S&P 500 Index decreased 1.4% Friday to 3,861.73, continuing the descent below its 200-day moving average.
- All 11 S&P 500 sectors declined as Consumer Staples (-0.5%) and Health Care (-0.7%) outperformed while Materials (-2.1%) and Real Estate (-3.3%) lagged the index.
- US equities and US Treasury yields fell today following the Federal Deposit Insurance Corp.'s possession of a US regional bank in order to protect insured depositors. As a result, futures markets anticipated tightening financial conditions and considered a 25bp rate hike as more likely than a 50bp hike following the Federal Open Market Committee (FOMC) March 21-22 meeting.
- Additionally, this morning's report of February US nonfarm payrolls showed a 311,000 gain (beyond expectations), while wages increased 0.2% and the unemployment rate rose 3.57%. Next Tuesday's Consumer Price Index report will provide the Fed with further insight to the extent of inflation ahead of the March FOMC monetary policy meeting.
- By the end of the trading day, US 10-year Treasury yields fell to 3.68% while US 2-year Treasury yields declined to 4.58%, taking the spread to -90 basis points. WTI oil rose 1.0% to $76.49 per barrel. The US Dollar Index fell 0.7%, while gold rose 2.1% to $1,869 per ounce.
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 remains intact. Corporate earnings revisions moved lower over the course of 2022, suggesting downside to forward earnings growth. We recommend investors focus on risk management through quality cash flows, defensiveness, and attention to stock-specific valuations. We suggest rebalancing portfolios and tax-loss harvesting during bear market rallies. In fixed income, the challenge is two-fold: generating sufficient income, while also preserving capital, given the potential for higher yields amid ongoing inflation. 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 higher real rates, falling operating leverage and the strong US dollar.
For US equities, the MS & Co. US Equity Strategy team sees the potential for further equity downside in the early part of 2023, given their base-case expectations of $195 for 2023E earnings, well below current consensus levels. Their 2023E S&P 500 base case provides a target of 3,900, based on 2024E earnings of $241. This scenario assumes that nominal top-line growth slows to the low single digits and that margins contract. Their 2023E bear case of 3,500 considers a severe earnings recession, margin pressure and a contraction of EPS growth. Their 2023E bull case of 4,200 corresponds to a mid-single-digit top-line growth rate and limited margin compression. This bull case forecast embeds an estimate of 16.7x MS & Co.'s forward 2024E earnings of $251.
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.