Markets and Investing
March 11, 2022
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
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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