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Weekly Market Guide: March 11th

Markets and Investing

        March 11, 2022

                Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.

Short-Term Summary:

We lowered our 2022 S&P 500 target yesterday to account for the Russia/Ukraine war and its potential effects on the macro and fundamental outlook. To be sure, the degree and duration of Russian escalation are very big unknowns that can change rapidly and have large implications on economic growth, inflation, and interest rates, along with complicating the Fed’s situation. In our base case expectation, we believe the war can subside over the coming months, inflation still moderate by year-end, US economic growth stay positive, and the Fed not overtighten. We lower our earnings estimate to $225 (from $235) as a result of softer economic growth and discretionary spending expectations from higher commodity prices. This is just above the current consensus estimate of $224, and reflects 9% growth y/y. We also believe valuation has become more compelling at current levels; and although multiples can contract further in the short-term as geopolitical tensions potentially escalate further, we believe they can rebound by year-end as the current headwinds clear up. The result is a likely choppy market as it deals with the headwinds of Russian war, higher commodity prices, softer economic growth, and a Fed rate hike cycle- but is still able to get back toward prior highs by year-end (4725 base case target). For further detail on the target changes, please see our full note here.

Technically, the S&P 500 remains in a downtrend with the series of lower highs and lower lows since January still in place. In assessing the potential for a market bottom, we are watching for price reversals and then follow- through. We have seen price reversals from weakness over the past two months, but have yet to penetrate obvious resistance levels on the rallies. After posting a new closing low on Tuesday, the S&P 500 had a good thrust day on Wednesday with the S&P 500 +2.6%, Nasdaq +3.6%, and Russell 2000 +2.7% (though internals were not as strong). This is a positive step, but we now need to see follow-through. We would like to see the S&P 500 take out the 4363-4400 resistance level and then eventually get through the 4600 level. Additionally, we are monitoring the price of oil as a potential indicator for the market’s trend- as lower or more stable commodity prices (when/if it occurs) may reduce economic concerns and, in turn, allow equities to stabilize/recover. This was the case in the 1990 Gulf War (and recession) in which the market bottom came in conjunction with a peak in the oil price spike. After reaching extreme levels, WTI crude oil pulled back yesterday- a step in the right direction, but follow-through is needed next technically (one day does not make a trend and we note numerous head-fakes during the 1990 oil spike). The path of the Russia/Ukraine war ahead remains an obvious influence (in either direction).

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Index Definitions

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.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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