Wealth Management — March 16, 2023
What Happened in the Markets?
- The S&P 500 Index rose 1.8% Thursday to 3,960.34, taking the index +3.1% year to date. Nine of the 11 S&P 500 sectors rose as Information Technology (+2.8%) and Communication Services (+2.8%) outperformed while Consumer Staples (-0.1%) and Real Estate (-0.1%) lagged the index.
S&P 500 Price vs. 50, 100, 200 Daily Moving Averages
- While news of pressures across the banking system filled headlines this week, US Treasury Secretary Janet Yellen provided comforting remarks during her presentation to the US Senate’s Committee on Finance today. She said, “I can reassure the members of the Committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them. This week’s actions demonstrate our resolute commitment to ensure that depositors’ savings remain safe.” Furthermore, during this update she also noted that “more work needs to be done” to bring inflation lower as the economy grows. Next week we will hear the Federal Open Market Committee (FOMC) rate decision from Fed Chair Powell after the March 21-22, 2023 meeting.
- This week included measures and protections put in place by the FDIC, the Federal Reserve, the Swiss central bank, as well as a consortium of large banks. The FDIC provided guarantees for all depositor funds of the two banks that failed following idiosyncratic issues. Additionally, the Federal Reserve issued the Bank Term Funding Program (BTFP) to essentially eliminate the need for banks to sell high-quality securities at a loss to meet deposit withdrawal shortfalls. And, today, the Swiss central bank supplied a bank loan to a global bank, while a consortium of large banks prepared deposits to stabilize a US regional bank.
- The mixed economic data and banking system news adds to the complexity of the potential Fed response next week. As a result, U.S. interest rate futures curves embed expectations that the Fed will raise its policy rates perhaps twice more, in March and May, followed by approximately three 25-bp rate cuts by January 2024.
- By the 4pm equity market close, the US Treasury 2-year yield gained 27bps to close the day at 4.16%, while the US Treasury 10-year yield rose 11bps to 3.57%. This led the 2Y10Y spread 15bp lower to -59.63bp. WTI oil rose 0.8% to $68.16 per barrel. The US Dollar Index declined to $104.40, while gold remained nearly flat at $1920.79 per ounce.
- 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.