The 1% Move Report

Wealth Management — April 11, 2022

• The S&P 500 declined 1.7% on Monday to close at 4,413. With the sell-off, the index is now down 7.4% year to date.
• US equity markets traded lower, ahead of a busy calendar week for economic data and earnings. Markets await tomorrow's CPI print which will be closely watched ahead of the May FOMC meeting; the forecast for headline CPI is an increase of 8.4% YoY, which would be the highest reading since 1982. Companies have begun to report Q1 earnings, with many Financials stocks set to hold earnings calls this week. The Nasdaq 100 declined 2.4%.   
• Each of the 11 S&P 500 sectors was lower, with Industrials (-0.3%), Materials (-0.5%) outperforming the broad market while Energy (-3.1%) and Communication Services (-2.9%) lagged.
• As of the 4pm equity market close, the 10-year Treasury yield rose to 2.77%, its highest level in three years.  WTI oil declined to nearly $95 per barrel. The US Dollar strengthened as measured by the US Dollar Index.

• Q1 Earnings Preview: For the S&P 500, bottom-up, share-weighted 1Q22 earnings growth is anticipated to be 5.5% YoY, with strong earnings growth expected from the Energy sector and a deceleration in earnings growth from the Financial sector. Excluding Energy, the S&P 500 is estimated to decline 0.1%. And, similarly, excluding Financials, S&P 500 earnings growth is expected to be 13.7% higher. Thus far, 20 companies reported 1Q earnings and 20 more are anticipated this week, including many Financial stocks. During company 1Q22 earnings calls, investors will be closely monitoring forward guidance as well as vulnerability of margins and earnings due to headwinds from higher input costs and deteriorating demand. 
• Monetary Policy: Last week, the FOMC's meeting minutes showed many policymakers approve of a 50 basis point hike at future meetings, should the data and conditions warrant it. Additionally, the minutes showed the committee was generally in agreement on reducing the size of the balance sheet by up to $95 billion per month, though had not yet decided on when to commence balance sheet reduction. A formal announcement could come as soon as the next FOMC meeting in May. MS & Co. Chief US Economist Ellen Zentner currently expects two 50 basis point hikes at both the May and June meetings, while the market is currently pricing a 90% chance of a 50 basis point hike in May and 86% chance for June. 
• Geopolitics and COVID Updates: As the war between Russia and Ukraine carries on, sanctions continue. Supply chains remain on pause as the COVID-19 shutdown has been extended in Shanghai. 
• Economic Calendar: CPI, NFIB Survey (4/12); PPI (4/13), Retail Sales, U. of Michigan Consumer Sentiment, Business Inventories, ECB rate decision (4/14); Industrial Production (4/15).

With the Fed poised to respond to 40-year highs in inflation through both rate hikes and balance sheet run-off in 2022, the GIC’s call for continued caution in the indices remains intact. Our base case year-end 2022 target of 4,400 for the S&P 500 and our bull case of 5,000 corresponds to a view that rising rates and higher policy uncertainty demands lower price/earnings ratios and our forecast embeds an estimate of 18x forward earnings, despite a forecast for earnings growth of 10%-12% in 2022. With earnings revisions moving lower off the prior peak, investors should focus toward risk management through quality factor exposure, defensiveness with regards to interest rate sensitivity, and attention to stock specific valuations. We are moving to a position of maximum diversification by sector and market cap, with interesting ideas being found in energy, industrials, materials, healthcare, consumer services, financials, utilities and staples. While the US recovery matures, we see opportunities outside the US as relatively more attractive especially given less expensive valuations and exposure to economic cyclicality. In fixed income, the challenge is two-fold: generating sufficient income, while also preserving capital in a rising rate and higher inflation environment. This requires a diversified and active exposure, with our preference toward core investment grade, preferreds, leveraged loans, and asset-backed securities, including select mortgage-backed, and dividend-paying stocks. Real assets such as gold, infrastructure, and real estate present an attractive opportunity as a portfolio ballast for income generation and as an inflation hedge.

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.

Important note regarding economic sanctions. This event may involve the discussion of country/ies which are generally the subject of selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries or multi-national bodies. The content of this presentation is for informational purposes and does not represent Morgan Stanley’s view as to whether or not any of the Persons, instruments or investments discussed are or may become subject to sanctions. Any references in this presentation to entities or instruments that may be covered by such sanctions should not be read as recommending or advising on any investment activities involving such entities or instruments.  You are solely responsible for ensuring that your investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.