The 1% Move Report

Wealth Management — March 11, 2022

• The S&P 500 dipped 1.3% Friday to close the week at 4,204. With today's decline, the index is now down 11.8% year to date. WTI oil rose 3% to $109 per barrel, and by the 4pm close, the 10-year yield was 2% and the dollar stronger.
• Markets continue to react to developing news surrounding geopolitical tensions, sanctions, supply shocks, and inflation concerns. It was a busy week with headlines leading the market. Including the updates around the Russia and Ukraine conflict:
  • US Treasury Secretary Janet Yellen noted that she sees a "soft landing" rather than a recession for the U.S. economy.
  • The ECB surprised markets with a hawkish announcement of faster tapering of QE and hinted that its asset purchase program could end as soon as 3Q. While sending a more hawkish message on QE and indicating that it "will take whatever action is needed," the ECB offered more measured guidance on future rate hikes that will happen after asset net purchases.
  • Additionally, the U.S. Senate passed a $1.5T spending bill with $13.6B of aid for Ukraine. 
• All 11 S&P 500 sectors closed the day lower. Communication Services (-1.9%) and Information Technology (-1.8%) underperformed the S&P 500 Index while Utilities (-0.4%), Financials (-0.7%) and Materials (-0.7%) outperformed.

• Geopolitical Tensions: The situation between Russia and Ukraine remains fluid as new developments arise by the day. 
• Monetary Policy: A 25bps rate hike is expected to be announced at next week's FOMC meeting. During the press conference on March 16, investors will be listening for signals from the central bank with regard to the amount and pace of future rate hikes. Last week, when Fed Chair Jerome Powell spoke with both the Senate and House of Representatives about the state of the economy and monetary policy, he reiterated the Fed's monetary policy goals of maximum employment and price stability and added his support for a 25-basis-point rate hike this month. He noted that plans for balance sheet reductions will come sometime soon after the first rate hike. Powell also mentioned that the Fed will be able to remain nimble in adjusting future policy given elevated geopolitical tension dynamics and the risks to the outlook for economic growth, while also closely monitoring incoming data. Markets will be focusing on Tuesday's February PPI report, Wednesday's Retail Sales, and Thursday's Industrial Production release.
• Economic Calendar: PPI and FOMC Meeting, first day (3/15); Retail Sales and FOMC Meeting, second day (3/16); Industrial Production and Housing Starts (3/17).

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, short-term tactical investors should upgrade their portfolios by dialing back extreme positioning and allocating more exposure toward high-quality cyclicals, defensives and growth at a reasonable price. We barbell Financials and Energy with exposure to Utilities, Staples and Healthcare. 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 a mix of cash/ultrashort duration, high yield credit, 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.