The 1% Move Report

Wealth Management — March 29, 2022

• The S&P 500 climbed 1.2% Tuesday to close at 4,632, up 11.1% from the March 8, 2022 low. The index has recorded gains in nine of the past eleven sessions and is now down 2.8% year to date.
• Stocks remained resilient on Tuesday as sentiment seemed to receive a boost from positive developments regarding the conflict between Russia and Ukraine. Markets may have also experienced a reprieve from lower interest rates after the latest surge, as yields across the curve were lower Tuesday. In addition, economic updates for Consumer Confidence, JOLTs, and S&P Case-Shiller home price were also in focus, with consumer confidence and home prices slightly ahead of consensus expectations. Philadelphia Fed President Harker spoke today at a meeting for the Center for Financial Stability adding further confirmation that half-point hikes are on the table if inflation data warrants it. 
• Ten of the 11 S&P 500 sectors closed the day higher with Real Estate (+2.8%) and Information Technology (+2.1%) outperforming the broad market, while Financials (+0.2%) and Energy (-0.4%) lagged.
• Intraday, the 2-year Treasury yield rose ahead of the 10-year yield, inverting the curve for the first time since September 2019. However, as of the 4 p.m. equity market close, the 10-year yield of 2.39% was back ahead the 2-year yield of 2.36%. WTI oil was lower to $105 per barrel while gold dipped to $1,920 per ounce.

• Monetary Policy: At its March meeting, the Fed delivered its 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. Since then, Federal Reserve Presidents have provided commentary indicating that 50bps hikes are possible if the data calls for it. 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 75% of a 50 basis point hike in May and 71% chance for June. 
• Geopolitics: The latest reports cited potential ceasefire talks between the Russia and Ukraine, though no confirmed reports have been cited as the situation still remains fluid. 
• Economic Calendar: ADP Employment Change (3/30); Jobless Claims, Personal Income & Spending (3/31); Nonfarm Payrolls, ISM Manufacturing, Construction Spending (4/1). 

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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