The 1% Move Report

Wealth Management — August 22, 2022

• The S&P 500 declined sharply on Monday, closing down 2.1% to 4,138. Ninety-five percent of constituents within the S&P 500 Index posted losses today. With the sell-off, the index is now down 13.2% year to date, and is 12.9% higher since the June 16 closing low.
• Financial markets opened this week similar to how they closed last, with both bonds and equities selling off in concert Monday. In particular, growth stocks drove weakness Monday as interest rates were higher across the curve; in fact, the 10-year Treasury yield eclipsed 3% for the first time since mid-July. Perhaps investors decided to take some risk off ahead of this week's Jackson Hole Economic Symposium, where many central banks are scheduled to speak on economic developments and the trajectory of monetary policy. 
• All 11 S&P 500 sectors ended the day lower. Energy (-0.2%) and Consumer Staples (-1.1%) were the largest relative outperformers while Information Technology (-2.8%) and Consumer Discretionary (-2.8%) lagged. 
• The CBOE Volatility Index (VIX) rose nearly 20% in the session to 24. The Nasdaq 100 fell 2.7% while the Russell 2000 index declined 2.1%.
• As of the 4pm equity market close, the 10-year Treasury yield rose to 3.03% and 2-year yields increased to 3.32%. WTI oil closed lower to $90 per barrel, while gold fell to $1,735 per ounce. The US Dollar Index posted modest gains.

• Monetary Policy: In July, the Federal Open Markets Committee (FOMC) announced its unanimous decision for a second consecutive 75-basis-point rate hike. Additionally, Fed Chair Powell indicated that future rate decisions will be made meeting by meeting and "another unusually large increase could be appropriate in September. As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases." MS & Co. economists forecast a 50-basis-point hike at the September FOMC meeting, followed by an additional 50-basis-point hike in November as well as a 25-basis-point hike in December to a peak rate of 3.625%. Regarding the balance sheet reduction program, which is anticipated to ramp through September, Fed Chair Powell communicated that the process to get back to equilibrium may take two to two-and-a-half years.
• Economic Calendar: S&P Global PMIs, New Home Sales (8/23); Durable Goods Orders, MBA Mortgage Apps, Pending Home Sales (8/24); Jobless Claims (8/25); UMich Sentiment, PCE Deflator (8/26). 

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 June 2023 base case provides a target of 3,900 for the S&P 500. This scenario assumes earnings and revenue growth decelerates due to high cost pressures in a slowing growth environment. Our June 2023 bear case of 3,350 considers a slowdown in earnings growth rate, margin pressure, sticky inflation, and a recession. Our June 2023 bull case of 4,450 corresponds to a soft landing environment where earnings growth slows but remains positive, inflation decelerates, cost pressures ease, and confidence improves. This bull case forecast embeds an estimate of 17.9x forward June 2024E earnings. 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 in Energy, Industrials, Materials, Health Care, 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.