The 1% Move Report

Wealth Management — April 19, 2022

• The S&P 500 rose 1.6% on Tuesday to close at 4,462. The index is now down 6.4% year to date.
• A better than anticipated housing starts report, lower energy prices and first quarter earnings led the markets today. The International Monetary Fund (IMF) reduced its economic growth forecasts by nearly a percentage point and the Strategic Petroleum Reserves noted a 4.7 million barrel decline in emergency stocks. Natural Gas fell 8.0% but remains near 14-year highs, and WTI oil dipped 5.2% to $102.5.
• Ten of the 11 S&P 500 sectors were higher, with Consumer Discretionary (+2.9%) and Real Estate (+2.1%) outperforming the broad market while Energy (-1.0%) and Utilities (+0.6%) lagged. 
• As of the 4pm equity market close, the Nasdaq 100 rose 2.2% and the Russell 2000 gained 2.0%. Additionally, the 10-year Treasury yield increased to 2.94%, gold dipped 1.5%, and the US Dollar Index strengthened to a two-year high.

• Q1 Earnings: During 1Q22 earnings calls, investors are closely monitoring forward guidance as well as vulnerability of margins, earnings, and valuations due to headwinds from higher input costs and deteriorating demand. According to Bloomberg, as of April 14th, the S&P 500, bottom-up, share-weighted 1Q22 earnings growth is anticipated to be 5.8% YoY, with strong growth expected from the Energy sector and a deceleration in earnings growth from the Financial sector. Excluding Energy, the S&P 500 share-weighted earnings growth is estimated to rise 0.2%. Similarly, excluding Financials, S&P 500 share-weighted earnings growth is expected to be 13.5% higher. As of the close on April 19th, 49 S&P 500 companies reported 1Q earnings and 51 more are anticipated later this week. More than 30% of the S&P 500 Financials constituents reported 1Q22 to date, with 90% reporting earnings above expectations.
• Monetary Policy: Today, the Chicago Fed President, Charles Evans, indicated he is comfortable with two 50 basis-point increases to reach the Fed Funds' neutral range of 2.25%-2.5% by year-end 2022.  Additionally, yesterday, St. Louis Fed President James Bullard said that he would not rule out a hike of 75 basis points at the May FOMC meeting, but that is not his base case. Earlier this month, the FOMC's April 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 noted that the committee was generally in agreement on reducing the size of the balance sheet by up to $95 billion per month, though the FOMC 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. 
• Geopolitics and COVID Updates: As the conflict between Russia and Ukraine carries on, sanctions continue. Supply chains remain on pause as the COVID-19 shutdown has been extended in Shanghai. 
• Economic Data Release: Today's housing starts and permits reports for the month of March surprised to the upside for the 2nd month in a row. Multi-family permits were up 10% sequentially while single-family permits dipped 4.8% sequentially. This was the second month of declines in single-family permits, suggesting the 2H may be softer for single-family housing starts. While mortgage rates have risen of late, lumber pricing has come down more than 30% and backlogs remain stable. 
• Economic Calendar: Existing Home Sales (4/20); Jobless Claims, Leading Indicators (4/21).

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 on risk management through quality factor exposure, defensiveness with regard 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 for 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.

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