The 1% Move Report

Wealth Management — March 24, 2022

• The S&P 500 rose 1.4% Thursday to close at 4,520. With the rally, the index has recorded gains in six of the past eight sessions and is now down 5.2% year to date.
• Focus remains on geopolitics, as additional sanctions against Russia were announced by the White House Administration, NATO and the Group of Seven today. Weekly jobless claims fell to the lowest level since 1969, which could have helped buoy sentiment on Thursday. Furthermore, S&P Global US PMIs came in higher than consensus expectations this morning. 
• All 11 S&P 500 sectors closed the day higher with Information Technology (+2.7%) and Materials (+2.0%) outperforming the broad market, while Consumer Staples (+0.6%) and Energy (+0.1%) lagged.
• Yields were higher across the curve as the 10-year Treasury yield rose to 2.36% as of the 4 p.m. equity market close. WTI oil was lower to $111 per barrel while gold rose 1% to $1,960 per ounce. The US dollar was higher as measured by the US Dollar Index. 

• Monetary Policy: Last week, the Federal Reserve actions mostly came in line with expectations, as they delivered 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 now expects two 50 basis point hikes at both the May and June meetings, with the market currently pricing a 78% of a 50 basis point hike in May and 60% chance for June. 
• Geopolitics: The geopolitical conflict still remains fluid as developments arise by the day. Additional sanctions were levied against Russia today, aimed at more than 400 Russian elites and entities.
• Economic Calendar: Pending Home Sales, 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.

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.