The 1% Move Report

Wealth Management — August 5, 2024

• The S&P 500 decreased 3.0% Monday to end the day at 5,186.33, having gained 8.7% thus far in 2024.
• All 11 S&P 500 sectors were lower on the day, as Industrials (-1.7%) and Consumer Staples (-1.9%) were the strongest-performing S&P 500 sectors, while Communication Services (-3.4%) and Information Technology (-3.8%) underperformed.
• By the 4:00 p.m. equity market close, the US 10-year Treasury yield decreased 1bp to 3.78%; WTI crude oil increased to $73.82 per barrel; and gold decreased 1.5% to $2,406.53 per ounce.

• The S&P 500 fell Monday to close its worst day since September 2022, driving 95% of its constituents lower, as markets continued a global risk-off posture amid growth concerns, following last week’s weaker-than-expected US labor data, rising geopolitical tensions, disappointing Tech sector earnings, and the unwinding of levered yen carry trades.
• Investors' de-risking caused implied equity volatility to reach its highest intraday levels since 2020, prompting speculation on an inter-meeting rate cut from the Fed. Futures markets suggested 125 bp of rate cuts from the Fed through the remainder of 2024. Corporate credit and interbank markets showed less stress than equity markets, where valuations had potentially become extended. Notably, Chicago Fed President Goolsbee cautioned against overreacting to one month’s data.
• Contrasting the challenging market action, the ISM Services data pointed to a better-than-expected headline reading, along with stronger Employment and New Orders subcomponents.

• The GIC recommends preparing for sideways-churning markets, neutralizing portfolio tilts versus benchmarks, and erring on the side of asset class diversification. With megacap and large-cap stocks likely continuing to trump small caps, add international exposure, stay neutral-to-underweight duration in rates and corporate credit, and use real assets and hedge funds to help mitigate emerging risks. Today's move does not meaningfully impact the GIC’s outlook. 
• Please find more information on the GIC's tactical positioning on the next two pages and reach out to your Morgan Stanley Financial Advisor to discuss portfolio strategies.

US: We recently closed our US large-cap equity underweight, which was premised on concerns about achievability of 2023 earnings estimates. While higher inflation should delay Fed rate cuts, more pricing power contributes to confidence that has risen, given GDP strength and visible international growth rebounds. Our preference is for cyclical and secular-growth equities with quality balance sheets.

International Equities (Developed Markets): Given weak currencies and dovish central banks in Japan and Europe, economic rebound should be at hand in the second half. Developed market exposure should skew toward commodities and materials exporters, especially those in the Asia Pacific region, including Japan.

Emerging Markets: Peaking US rates and, in turn, the US dollar, likely set up a second half rebound for EM ex China, given improving global growth dynamics. We favor Brazil, India and Mexico.

US Investment Grade: Stronger-than-anticipated economic growth is preserving the strength of corporate cash flows. While rates have backed up to reflect "higher-for-longer" expectations, yield spreads have remained well behaved. With geopolitical uncertainty high and equity valuations broadly rich, we like coupons of bonds with index-matching or shorter durations.

International Investment Grade: Yields are decent, central banks may soon cut rates and there is room for spread tightening as economic growth improves.

Inflation-Protected Securities: Real yields have sold off and are now bordering on cheap relative to the past two years. The securities could be a potential buy in a stagflationary environment.

High Yield: We have eliminated our exposure to the equity-like asset class to reduce equity beta of portfolios. High yield bonds rallied aggressively after the unprecedented provision of liquidity from the Fed and fiscal stimulus from Washington. However, currently, there appears to be limited upside and much downside to investments in riskier products, given the market environment.

REITS: We expect higher stock-bond correlations, which place a premium on the diversification benefits of investing in real assets. Nevertheless, with real interest rates positive and services inflation remaining quite sticky, we would need to be selective in adding to this asset class.

Commodities: Global reflation, tense geopolitics, especially in the Middle East, and ongoing fiscal spending suggest decent upside potential for precious metals and industrial-related commodities, including energy.

MLP/Energy Infrastructure: We are increasing exposure to real assets, with a preference for energy infrastructure and MLPs. Competitive yields and expectations for continued capital discipline amid stable oil and gas prices over the next six months underpin our decision, as does hedging against geopolitical risks.

Hedged Strategies (Hedge Funds and Managed Futures): The current environment appears constructive for hedge fund managers, who are frequently good stock pickers and can use leverage and risk management to potentially amplify returns. We prefer very active and fundamental strategies, especially high-quality, low beta, low volatility and absolute return hedge funds.

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.