The 1% Move Report

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

 

 

 

 

 

Wealth Management — March 9, 2023

Source: Bloomberg and Morgan Stanley Wealth Management Global Investment Office as of 3/9/2023.

What Happened in the Markets?

  • The S&P 500 Index decreased 1.8% Thursday to 3,918.43. The index is now up 2.1% year to date. 
  • All 11 S&P 500 sectors declined as Utilities (-0.8%) and Consumer Staples (-1.0%) outperformed while Materials (-2.5%) and Financials (-4.1%) lagged the index.
  • US equity markets reversed early session gains today. With the highly anticipated employment report out Friday, and CPI next week, it appeared investors decided to take some equity risk off the table.
  • Additionally, a mid-cap commercial bank plunged amid a new stock offering to help alleviate financing problems. This potentially caused sentiment to turn negative for both the broad market and Financials sector. In fact, the S&P 500 Financials sector declined 4.1%, its worst one-day performance since June 2020.
  • By the end of the trading day, US 10-year Treasury yields fell to 3.92% while US 2-year Treasury yields declined to 4.89%, taking the spread to -97 basis points. 
  • As of the 4pm equity market close, WTI oil fell 1.6% to $75.46 per barrel. The US Dollar Index fell modestly while gold rose nearly 1% to $1,830 per ounce.

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

Source: Bloomberg and Morgan Stanley Wealth Management GIO. Data as of March 9, 2023.

The Global Investment Committee’s Outlook

Source: Morgan Stanley Wealth Management 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 17US dollar against a subset of the broad index currencies that circulate widely outside the US.

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