Wealth Management — March 7, 2023
What Happened in the Markets?
- The S&P 500 Index decreased 1.5% Tuesday to 3,986.44. The index is now up 3.8% year to date.
- All 11 S&P 500 sectors declined as Consumer Staples (-1.0%) and Communication Services (-1.1%) outperformed while Real Estate (-2.5%) and Financials (-2.6%) lagged the index.
S&P 500 Price vs. 50, 100, 200 Daily Moving Averages
- Today, Fed Chair Powell provided the semiannual Monetary Policy Report to the Senate Banking Committee. Within this report, he highlighted that since economic data indicates inflation remains persistent and elevated, "the ultimate level of interest rates is likely to be higher than previously anticipated."
- Should economic data continue to be strong, the Federal Open Market Committee (FOMC) may decide at its March meeting (March 21-22, 2023) that it needs to raise rates beyond an incremental 25 basis point hike in order to return inflation to its 2% target. MS & Co. US Economist Ellen Zentner believes the FOMC could return to 50bp hikes, depending on economic data.
- This Friday's payrolls report will provide additional clarity on the current level of tightness in the labor market.
- By the end of the trading day, US 10-Year Treasury yields rose to 3.97% while US 2-Year Treasury yields increased to 5.01%, taking the spread below -100bps for the first time since 1980. Meanwhile, US 6-month Treasury yields closed at 5.15%.
- Fed Fund futures are now pointing to a 50 basis point rate hike at the March meeting (67% chance today vs. 31% chance yesterday).
- As of the 4pm equity market close, WTI oil fell 3.8% to $77.42 per barrel. The US Dollar index rose 1.2% while gold declined 1.7% to $1,814.75 per ounce.
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 US dollar against a subset of the broad index currencies that circulate widely outside the US.