The 1% Move Report

Wealth Management — March 17, 2022

• The S&P 500 gained 1.2% Thursday to close at 4,412. With today's rally, the index is now down 7.4% year to date. 
• US equities traded higher for the third consecutive session, as the S&P 500 recorded the best three-day gain since November 2020. Investors digested the developments from yesterday's Federal Reserve meeting, where the Fed raised the federal funds target rate by 25 basis points for the first time since 2018. The move was widely anticipated by markets which had already priced in 7 hikes for 2022. After the rate decision, Treasury bonds sold off and equities rallied. On Thursday, the S&P 500 extended recent gains led by the Energy sector, which outperformed as oil prices surged back above $100 per barrel.  
• All 11 S&P 500 sectors closed the day higher with Energy (+3.5%) and Materials (+2.0%) outperforming the broad market, while Consumer Staples (+0.6%), and Utilities (+0.5%) lagged.
• Interest rates were little changed across the curve, with 10-year Treasury yields at 2.19% as of the 4 p.m. equity market close. WTI oil closed sharply higher to over $103 per barrel, while gold was also higher to $1,940 per ounce. The US Dollar weakened as measured by the US Dollar Index.

• Monetary Policy: The Federal Reserve met market expectations with Wednesday's meeting by raising the federal funds target rate by 25 basis points. However, there were significant revisions to the Summary of Economic Projections (SEP), with the Fed's 2022 core Personal Consumption Expenditures (PCE) forecast moving to 4.1% from the previous 2.7% December projection, while real GDP forecast was lower to 2.4% (from 4% previously). The median dot plot showed 7 hikes this year and a projection of 1.875% for the year-end 2022 funds rate, also in line with market expectations; MS & Co. Chief US Economist Ellen Zentner stated how there were seven policymakers that had their 2022 projections above the median 2022 year end dot of 1.875%, which leans hawkishly for the 2022 rate hike outlook. Regarding the balance sheet, the Fed stated they would look to reduce its size "at a coming meeting." Markets have taken the Fed announcement in stride so far, with the S&P 500 further extending gains on Thursday. 
• Economic Data: Housing data was strong on Thursday, with both housing starts and building permits coming in higher than consensus expectations. The Philadelphia Fed Business Outlook also meaningfully beat analyst forecasts, printing at 27.4 versus 14.8. Employment data was constructive, as weekly initial jobless claims were slightly lower than consensus, at 214,000.  
• Economic Calendar: Existing Home Sales, Leading Index (3/18). 

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 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.

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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