Wealth Management — March 22, 2023
What Happened in the Markets?
- The S&P 500 Index declined 1.6% Wednesday to 3,936.97. With the decline, the index is now up 2.5% year to date.
- All 11 S&P 500 sectors declined on the day, as IT (-0.9%) and Consumer Staples (-1.0%) outperformed while Financials (-2.4%) and Real Estate lagged (-3.7%).
- This afternoon we heard Fed Chair Powell deliver the Federal Open Market Committee's (FOMC) decision to raise the federal funds rate 25 basis points with a target rate of 4.75%-5%. During the press conference, he provided assurances that the recent events in the regional bank sub-industry group were isolated and that there is ample liquidity available in the banking system as well as tools that may be used to keep the banking system stable. Additionally, he reiterated that since inflation remains high, there remains "a long way to go" to return inflation to the FOMC's 2% goal. He noted that "additional policy firming may be appropriate." While it is too early to tell the affect the recent pressures in the regional bank sub-industry group have had and will have on the economy, he noted that there is a possibility that the impact could be equivalent to a rate hike, or more over time. In this case, "monetary policy may have less work to do." Committee members did not consider a rate cut to happen at any point this year but plan to continue the balance sheet run-off program as originally planned.
- Meanwhile, during a Senate subcommittee meeting, Treasury Secretary Janet Yellen indicated that the $250,000 level for deposit insurance will be reconsidered.
- By the 4pm equity market close, the US 10-year Treasury yield fell 16 basis points to 3.45%. Gold rose 1.7% to $1,973 per ounce, while WTI oil rose 0.5% to $70.02 per barrel.
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.