The 1% Move Report

Wealth Management — March 22, 2022

• The S&P 500 rose 1.1% Tuesday to close at 4,512. The index is now down 5.3% year to date after rebounding 8.2% since the 2022 low on March 8th.  Constituents within the S&P 500 Consumer Discretionary and Information Technology sectors have outperformed the index off of 2022 lows. 
• Chair Powell presented at the National Association for Business Economics meeting Monday and echoed last week's FOMC commentary. Decisions have not yet been made on balance sheet reductions but could come as soon as the May meeting. Additionally, he indicated that if the FOMC decides "that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings," or if there is a "need to tighten beyond common measures of neutral and into a more restrictive stance," the FOMC will do so. Markets are pricing in 1.7 hikes for the May FOMC meeting, suggesting there is a 70% chance of a 50bp hike at the May meeting. Inflation remains high and a slower growth environment is materializing in the United States adding pressure to outlooks for revenue and margin expansion.  
• Ten S&P 500 sectors closed the day higher with Consumer Discretionary (+2.4%) and Communication Services (+2.0%) outperforming the broad market, while Energy (-0.7%), and Health Care (0.0%) lagged.
• The 10-year Treasury yield was 2.38% by the 4 p.m. and WTI oil closed near $112 per barrel.

• Monetary Policy: This past Wednesday, the Federal Reserve actions mostly came in line with expectations, delivering the first rate hike since 2018 along with a projection of 1.9% for the Fed Funds rate by the end of 2022 and a median of 2.8% for the following two years. This suggests seven rate hikes (including the one just announced) could occur by the end of 2022. Fed Chair Powell noted that the timing and size of these hikes will not be determined until incoming data is reviewed and the outlook is assessed at each meeting. Additionally, the balance sheet reductions, which Powell expects to announce "at a coming meeting," may be equivalent to another rate increase. This aligns with the Fed's recent stance that it will be more nimble regarding monetary policy actions and observe incoming data closely. MS & Co. Chief US Economist Ellen Zentner stated that 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. 
• Geopolitics and COVID Updates:  China is identifying a path toward an easing of future COVID related restrictions. The situation between Russia and Ukraine remains fluid as new developments arise by the day.
• Economic Calendar: New Home Sales (3/23), Durable Goods (3/24), University of Michigan Consumer Sentiment (3/25).

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.

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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