The 1% Move Report

Timely commentary on market performance whenever the S&P 500 changes more than 1% in a day.

 

 

 

 

 

Wealth Management — January 18, 2023

Source: Bloomberg and Morgan Stanley Wealth Management Global Investment Office as of 1/18/2023.

What Happened in the Markets?

  • The S&P 500 fell 1.6% Wednesday to close at 3,928.84. The index is now up 2.3% year-to-date.
  • Each of the 11 S&P 500 sectors posted declines on the day. Communication Services (-0.9%) and Information Technology (-1.3%) outperformed while Utilities (-2.4%) and Consumer Staples (-2.7%) lagged the index.
  • US stocks recorded the largest down day in a month as weak economic data drove risk-off behavior. While Treasuries rallied across the curve, all 11 S&P 500 sectors had losses. Retail Sales and Industrial Production economic releases were considerably below consensus estimates. However, additional signs of cooling inflation were also present, as the Producer Price Index (PPI) reported at 6.2% YoY, lower than the median consensus expectation of 6.8%.  
  • As of the 4 pm equity market close, WTI oil declined for the first time in nine days to just below $80 per barrel. Rates were sharply lower across the curve, with the 10-year Treasury yield down 18 basis points to 3.37%. Gold retreated modestly toward $1,900 per ounce.

Looking Ahead

S&P 500 Price vs 50, 100, 200 Daily Moving Averages

Source: Bloomberg and Morgan Stanley Wealth Managment Global Investment Office. Data as of January 18, 2023.
  • Monetary Policy- After the FOMC decided to slow the pace of the December rate hike to a 50-basis-point (bp) increase and continue significant reductions to the Fed's balance sheet, Fed Chair Powell noted that "it is good to see progress, (but) there is still a long way to go" before the committee is confident inflation is moving closer to the 2% goal. The FOMC does not anticipate that inflation will come down quickly in the non-housing-related core services segment due to the strength of the labor market, and the Fed Chair maintained that additional rate hikes are possible. Once the policy stance is restrictive enough, the committee expects to keep rates stable. The committee will monitor wages and labor market supply/demand imbalances for the February FOMC decision.
  • MS & Co.'s Ellen Zentner continues to expect an announcement of a 25-bp hike at the February meeting, with the potential for additional FOMC rate hikes in 2023, should jobs growth continue.

The Global Investment Committee’s Outlook

Source: Morgan Stanley Wealth Managment Global Investment Office as of December 8, 2022.

With the Fed responding to 40-year highs in inflation through both rate hikes and balance sheet run-off in 2022, the GIC’s call for continued caution remains intact. Corporate earnings revisions moved lower over the course of 2022, suggesting downside to forward earnings growth. We recommend investors focus on risk management through quality cash flows, defensiveness, and attention to stock-specific valuations. We suggest rebalancing portfolios and tax-loss harvesting during bear market rallies. In fixed income, the challenge is two-fold: generating sufficient income, while also preserving capital, given the potential for higher yields amid ongoing inflation. This requires diversified and active exposure, with our preference for core investment grade fixed income and dividend-paying stocks. Consider revisiting positioning in long-duration/growth equities, where there may not be adequate compensation for the risks of higher real rates, falling operating leverage and the strong US dollar. 

For US equities, the MS & Co. US Equity Strategy team sees the potential for further equity downside in the early part of 2023, given their base-case expectations of $195 for 2023E earnings, well below current consensus levels. Their 2023E S&P 500 base case provides a target of 3,900, based on 2024E earnings of $241. This scenario assumes that nominal top-line growth slows to the low single digits and that margins contract. Their 2023E bear case of 3,500 considers a severe earnings recession, margin pressure and a contraction of EPS growth. Their 2023E bull case of 4,200 corresponds to a mid-single-digit top-line growth rate and limited margin compression. This bull case forecast embeds an estimate of 16.7x MS & Co.'s forward 2024E earnings of $251.

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 US dollar against a subset of the broad index currencies that circulate widely outside the US.

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International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies. Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied economic conditions. The value of fixed income securities will fluctuate and, upon a sale, may be worth more or less than their original cost or maturity value. Bonds are subject to interest rate risk, call risk, reinvestment risk, liquidity risk, and credit risk of the issuer. High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. Ultrashort-term fixed income asset class is comprised of fixed income securities with high quality, very short maturities. They are therefore subject to the risks associated with debt securities such as credit and interest rate risk.

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity.

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Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.

Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations. 

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