Wealth Management — March 14, 2023
What Happened in the Markets?
- Today's news brought the Consumer Price Index (CPI) release for February as well as additional U.S. banking sector assurances.
- The S&P 500 Index gained 1.7% Tuesday to 3,920.30, taking the index up 2.1% year to date. Each of the 11 S&P 500 sectors rose as Communication Services (+2.7%) and Information Technology (+2.3%) outperformed while Consumer Staples (+0.8%) and Real Estate (+0.8%) lagged the index.
- Meanwhile, by the 4pm equity market close, US Treasury yields increased after Monday's significant declines. The US Treasury 2-year yield rose 25bps to close the day at 4.22%, while the US Treasury 10-year yield climbed 9bps to 3.66%. This led the 2Y10Y spread to return lower (to -58bp) after yesterday's nearly 70bp improvement (from -109bp).
- By the end of the day, WTI oil declined 4.5% to $71.44 per barrel. The US Dollar Index remained at $103.6, while gold moved 0.5% lower to $1,903.9 per ounce.
S&P 500 Price vs. 50, 100, 200 Daily Moving Averages
- The CPI report showed inflation remained elevated and sticky, yet came in-line with consensus expectations (Headline CPI +6.0%y/y; Core CPI (ex food and energy) +5.5%y/y). Shelter costs were the largest contributor to the increase. Since the report provided the Federal Open Market Committee (FOMC) with another set of data ahead of their March rate decision, the futures market now estimates a 71% chance that the FOMC will raise rates 25bps following the March 21-22 meeting as well as a 66% chance the FOMC will raise rates 25bps after the May meeting. The estimate of a 25bp hike at each of the March and May FOMC meetings is in line with MS & Co. Ellen Zentner's forecast, which also considers the potential for additional tightening beyond May.
- Markets seem to be reassured following Sunday's joint statement by the Treasury, Federal Reserve, and the Federal Deposit Insurance Corp. (FDIC). The release announced additional banking system protections and funding through the new Bank Term Funding Program after idiosyncratic liquidity pressures were experienced in the US regional bank sub-industry group last week.
- Nonetheless, we continue to see U.S. economic fragility and slower economic growth leading to lower corporate earnings.
The Global Investment Committee’s Outlook
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.