The 1% Move Report

Wealth Management — January 10, 2025

• The S&P 500 decreased 1.5% Friday to end the day at 5,827.04, having lost 0.9% thus far in 2025.
• One of the 11 S&P 500 sectors was higher on the day, as Energy (+0.3%) and Utilities (-0.6%) were the strongest-performing S&P 500 sectors, while Financials (-2.4%) and Real Estate (-2.5%) underperformed.
• By the 4:00 p.m. equity market close, the US 10-year Treasury yield increased to 4.76%; WTI Crude increased to $76.67 per barrel; and gold increased to $2,692.46 per ounce.

• US equities declined on Friday, erasing 2025's gains, after strong payrolls data pushed Treasury yields higher across the curve and delayed expectations for additional Fed easing in 2025. The VIX rose above 20, signaling increased investor caution and underscoring the emphasis on earnings achievability as a critical driver of equity returns.
• Nonfarm payrolls rose by 256,000 in December, surpassing expectations and hitting the highest level since March. The unemployment rate unexpectedly ticked down to 4.1% from 4.2%, pointing to the labor market's robustness.
• The University of Michigan's Consumer Sentiment survey fell to 73.2 from 74.0. Fueled by worries of stubborn price pressures, consumers' long-term inflation expectations jumped to the highest level since 2008. More consumers expressed concerns about the potential impact of tariffs, as nearly one-third of respondents mentioned tariffs vs. 24% in December.

• 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, stay neutral 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: Following our last portfolio update on November 13, we have added again to large cap value and mid-cap growth. We believe that these two strategies will be the biggest beneficiaries of the incoming Trump administration's focus on deregulation and tax cuts. US large cap growth remains expensive, concentrated, anchored on ambitious earnings forecasts for 2025 and well over-owned. Among the Mag 7, we want to market weight at most and suggest a move from passive to active management or direct indexing to allow for differentiation among the top names where we expect performance dispersion in 2025.  

International Equities (Developed Markets): Given weak currencies and dovish central banks in Japan and Europe, economic rebound should be at hand-but Trump's election, supported by a legislative majority in Congress suggests that his trade and foreign policies vis a vis Ukraine/Russia may be particularly negative for Europe. We reduced exposure there in our latest trade in November.

Emerging Markets: China stimulus, while potentially insufficient to address the challenges of the country's secular bear market, is likely enough to help stabilize the downturn in the short term. The US-China trade conflict under incoming President Trump remains a wildcard, and we expect that China stimulus is being kept waiting in order to see the US' first move on tariffs. Given that valuations in the region are already nondemanding, we are inclined to be patient and wait for recovery. The US dollar, now at a 52 week high and within 5% of cyclical and 20-year highs, will 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 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, there is currently limited upside. Ultra-tight spreads may be the result of increasing competition for capital with private credit financial sponsors and general partners and may not fully reflect adequate compensation for default risk. 

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 broadly. We are focused on interesting opportunities in solving the residential housing shortage.  

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. Recent sell-off in gold is an opportunity for those looking for hedges.  

MLP/Energy Infrastructure: We previously increased 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 underpin our decision, as does hedging against geopolitical risks.  

Hedged Strategies (Hedge Funds and Managed Futures): We recently added to equity hedged positions noting the pickup in idiosyncratic risk, falling borrowing costs and rising volatility. 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.