Wealth Management — March 17, 2023
What Happened in the Markets?
- The S&P 500 Index fell 1.1% Friday to 3,916.69, taking the index to up 2.0% year to date. All 11 S&P 500 sectors posted one day declines.
- As news of pressures and uncertainties troubled the banking system this week, swings occurred across markets. US Treasury yields dipped dramatically, while in equities, growth outperformed and investors rotated back to tech. Since last Friday, the S&P 500 Index rose 1.4% while the Nasdaq 100 index gained 5.8%. For the week, within the S&P 500, Communication Services (+6.9%), Information Technology (+5.7%), and Utilities (+3.9%) led the way while Energy (-7.0%) and Financials (-6.2%) declined.
- The week included a mixed set of economic data. Amid signs of stress, investors found reassuring remarks by US Treasury Secretary Janet Yellen on the banking system—plus measures and protections put in place by the FDIC, the Federal Reserve, the Swiss central bank, and a consortium of large banks to rebuild confidence in the banking system. Each layer of support adds to the complexity of next week's Fed rate decision, which will be announced on March 22. MS & Co.'s US Economics team forecasts the Fed will deliver a 25bp rate hike at each of the March and May meetings, to a peak rate of 5.125%. The team then expects the Fed to pause until the Fed cuts rates 25bp in March 2024.
- By the 4pm equity market close, the US 2-year Treasury yield fell 31bps to close the day at 3.85% (down from 5.07% just last Wednesday), while the US 10-year Treasury yield declined 17bps to 3.41%. This led the 2Y10Y spread 16bp higher to -43bp. WTI oil dipped 3.0% to $66.19 per barrel. The US Dollar Index declined to $103.88, while gold rose 2.9% to $1975.83 per ounce.
- We continue to see US economic fragility and slower economic growth leading to lower corporate earnings.
S&P 500 Price vs. 50, 100, 200 Daily Moving Averages
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.