The 1% Move Report

Wealth Management —December 22, 2022

• The S&P 500 declined 1.4% Thursday to close at 3,823. The index is now down 19.8% year-to-date. 
• Eighty-two percent of the S&P 500 constituents fell on the day as all 11 S&P 500 sectors had losses: Energy (-0.2%) and Consumer Staples (-0.3%) outperformed while Information Technology (-2.5%) and Consumer Discretionary (-2.6%) lagged the index. 
• Reversing nearly all of yesterday's rally, equity markets turned sharply lower on Thursday. Weak earnings results from a large chipmaker company caused technology stocks to underperform and drove broad markets lower. The Conference Board Leading Indicators index fell for the ninth month in a row, below the month-over-month consensus estimates. This signaled a further deterioration in economic growth prospects. 
• By the 4 pm equity market close, WTI oil was nearly flat at $78 per barrel while the 10-year US Treasury yield increased to 3.68%

• Monetary Policy: Last week Fed Chair Powell announced the FOMC decided to slow the pace of the December rate hike to a 50-basis-point increase, taking the Federal Funds rate to 4.25%-4.50%, while continuing the significant reductions to the Fed's balance sheet. He noted that "it is good to see progress, (but) there is still a long way to go" before the committee is confident inflation is moving closer to the 2% goal. It will take time for the full effect of the restrictive policy actions to be felt in the economy. He said that ongoing rate increases are possible, when appropriate. The committee does not anticipate that inflation will come down quickly in the non-housing-related core services segment, which remains elevated due to the strength of the labor market, and maintained that additional rate hikes are possible. Once the policy stance is restrictive enough, the committee expects to keep rates stable. The committee will be monitoring wages and labor market supply/demand imbalances for the February 1, 2023,  FOMC decision.  MS & Co.'s Ellen Zentner continues to expect an announcement of a 25-basis-point hike at the January 31-February 1, 2023, meeting, helped by the potential for slower job growth. Additionally, she anticipates a peak range of 4.5%-4.75%, after which rates should remain level until December 2023 when a first rate cut of 25 basis points may occur. 

Calendar:

• 12/23: University of Michigan Sentiment, Durable Goods, PCE Deflator, New Home Sales

With the Fed responding to 40-year highs in inflation through both rate hikes and balance sheet run-off in 2022, the GIC’s call for continued caution remains intact. Corporate earnings revisions have moved lower over the course of the year, suggesting downside to forward earnings growth. We recommend investors focus on risk management through quality cash flows, defensiveness, and attention to stock-specific valuations. We suggest rebalancing portfolios and tax-loss harvesting during bear market rallies. In fixed income, the challenge is two-fold: generating sufficient income, while also preserving capital, given the potential for higher yields amid ongoing inflation. This requires diversified and active exposure, with our preference for core investment grade fixed income and dividend-paying stocks. Consider revisiting positioning in long-duration/growth equities, where there may not be adequate compensation for the risks of higher real rates, falling operating leverage and the strong US dollar. For US equities, the US Equity Strategy team sees the potential for further equity downside in the early part of 2023, given their base-case expectations of $195 for 2023E earnings, well below current consensus levels. Their 2023E S&P 500 base case provides a target of 3,900, based on 2024E earnings of $241. This scenario assumes that nominal top-line growth slows to the low single digits and that margins contract. Their 2023E bear case of 3,500 considers a severe earnings recession, margin pressure and a contraction of EPS growth. Their 2023E bull case of 4,200 corresponds to a mid-single-digit top-line growth rate and limited margin compression. This bull case forecast embeds an estimate of 16.7x MS & Co.'s forward 2024E earnings of $251.

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.