Weekly market guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
Short-Term Summary:
Equity markets remain choppy as investors digest the highly fluid (and uncertain) news flow from the Russia/ Ukraine war. We are encouraged by signs of positive talks between the two sides; but until resolution is found, the risks remain skewed to the downside. The war’s duration and degree (of escalation) will put upward pressure on inflation and downward pressure on global economic output (particularly Europe). Moreover, in the event of a potential ceasefire, we are not convinced that equities will simply surge back to prior highs as the focus will shift back to inflation and the path of Fed policy.
Yesterday’s FOMC meeting announced an expected 25bp rate hike, but the focus was on further hawkish commentary. The median Fed funds rate projection is now six more rate hikes this year (signaling one hike per meeting) with further hikes to 2.75% by year-end 2023. Half of the Committee members actually expect an even faster rate hike cycle with over six more rate hikes this year (implying a 50bp hike at some point). Balance sheet shrinkage is also set to begin in the coming months. The net result is a Fed determined to find price stability with every meeting this year considered “live” as it battles high inflation. Of course, the upshot is also that potential improvements in inflationary pressures over the year may leave upside from a more gradual Fed pace or dovish commentary (Fed remains “data-dependent”).
Short-term, we are monitoring the S&P 500’s price action as it approaches the upper end of its year-to-date downward trend. We would like to see the index break above the 4383-4400 level, followed by the 50- and 200- day moving averages at 4436 and 4468, respectively. Taking out these levels would indicate the market may be transitioning into a more sideways pattern as it potentially rebuilds itself for renewed upside. But until this occurs, we remain a bit cautious tactically with the short-term trend still downward.
Despite the obvious market headwinds, we still expect positive (albeit more moderate) returns over the next 12 months- and believe the S&P 500 can reach prior highs by year-end (4725 base case target). We use a $225 earnings estimate and 21x P/E as part of our base case scenario, along with expectations that the war can subside over the coming months, inflation still moderate by year-end, US economic growth stay positive, and the Fed not overtighten. For further detail on our base, bull, and bear case scenarios, please refer to our note here.
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The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.
The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.
MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.
MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy, and banks.
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