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THE 1% MOVE REPORT



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

 

 

 

 

 



Wealth Management — February 17, 2022


WHAT HAPPENED IN THE MARKETS?

 * The S&P 500 declined 2.1% Thursday to close at 4,380. With today's dip, 33%
   of index constituents are down more than 20% from 52-week intraday highs. The
   index is now down 8.1% year-to-date.
 * US equities have been volatile as markets react to headlines surrounding
   geopolitical tensions between Russia and Ukraine. Markets took on a
   particularly defensive tone on Thursday as Treasury bonds rallied across the
   curve, gold rose over 1% while Consumer Staples and Utilities were the only
   positive S&P 500 sectors in the session. In economic data, housing starts
   missed expectations while weekly jobless claims were larger than consensus
   forecasts.
 * Nine of the 11 S&P 500 sectors were lower on the session, with Consumer
   Staples (+0.9%) and Utilities (+0.1%) the only sectors positive.
   Communication Services (-3.0%) and Information Technology (-3.1%) were the
   largest laggards on the day. 
 * 10-year Treasury yields declined to 1.96% as of the 4 pm equity market close
   and the US dollar Index modestly strengthened. WTI oil prices declined 2%
   with WTI trading near $92 per barrel, while gold gained more than 1%, closing
   in on $1,900 per ounce. 
 * The Nasdaq 100 declined 3.0% and the Russell 2000 Index dipped 2.5%.


WHAT TO WATCH GOING FORWARD

 * 4Q21 Earnings: So far, 82% of the S&P 500 has reported earnings with 31%
   blended 4Q21 earnings growth year over year (y/y). Looking out to the end of
   2022, current consensus estimated earnings growth of 7.5% y/y has fallen from
   the January 1, 2022 estimate of 8.4% y/y growth. Additionally, earnings
   revision breadth (the difference between sell-side earnings estimates that
   are revised upward and downward over the total number of revisions) is
   trending down in Communication Services, Consumer Discretionary, Financials,
   and Materials. There are eight additional companies that are anticipated to
   report earnings through Friday and another 56 by the end of next week. 
 * Economic Data Updates: This week's economic reports showed Industrial
   Production, Capacity Utilization and Retail Sales all came in ahead of
   expectations, while housing data was mixed with NAHB Housing Market Index
   reporting above consensus and housing starts below. Jobless claims climbed on
   Thursday, reporting above expectations and higher than the prior month's
   reading.  
 * Monetary Policy: Markets continue to gauge the timing and scale of future
   U.S. rate hikes and balance sheet adjustments that are anticipated to begin
   following the next Fed meeting March 15-16. 
 * Economic Calendar: Leading Index, Existing Home Sales (2/18).


THE GLOBAL INVESTMENT COMMITTEE’S OUTLOOK

With the Fed poised to respond to 40-year highs in inflation through both rate
hikes and balance sheet run-off in 2022, the GIC’s call for a 5%-15% correction
in the indices remains intact. Our base case year-end 2022 target of 4,400 for
the S&P 500 and our bull case of 5,000 corresponds to a view that rising rates
and higher policy uncertainty demands lower price/earnings ratios and our
forecast embeds an estimate of 18x forward earnings, despite a forecast for
earnings growth of 10%-12% in 2022.  With earnings revisions likely peaking,
short-term tactical investors should upgrade their portfolios by dialing back
extreme positioning and allocating more exposure toward high-quality cyclicals,
defensives and growth at a reasonable price. We barbell Financials and Energy
with exposure to Utilities, Staples and Healthcare.  While the US recovery
matures, we see opportunities outside the US as relatively more attractive
especially given less expensive valuations and exposure to economic cyclicality.
 In fixed income, the challenge is two-fold: generating sufficient income, while
also preserving capital in a rising rate and higher inflation environment.  This
requires a diversified and active exposure, with our preference toward a mix of
cash/ultrashort duration, high yield credit, preferreds, leveraged loans, and
asset-backed securities, including select mortgage-backed, and dividend-paying
stocks. Real assets such as gold, infrastructure, and real estate present an
attractive opportunity as a portfolio ballast for income generation and as an
inflation hedge.

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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DISCLOSURES

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith
Barney LLC, a registered broker-dealer in the United States. This material has
been prepared for informational purposes only and is not an offer to buy or sell
or a solicitation of any offer to buy or sell any security or other financial
instrument or to participate in any trading strategy.  Past performance is not
necessarily a guide to future performance.

The material has been prepared for informational purposes only and is not an
offer or recommendation to buy, hold or sell or a solicitation of an offer to
buy or sell any security, sector or other financial instrument, or to
participate in any trading strategy. It has been prepared without regard to the
individual financial circumstances and objectives of individual investors. The
appropriateness of a particular investment or strategy will depend on an
investor's individual circumstances and objectives. This material is based on
public information as of the specified date, and may be stale thereafter. We
have no obligation to tell you when information herein may change. We and our
third-party data providers make no representation or warranty with respect to
the accuracy or completeness of this material. Past performance is no guarantee
of future results. This material should not be viewed as advice or
recommendations with respect to asset allocation or any particular investment.
This information is not intended to, and should not, form a primary basis for
any investment decisions that you may make. Morgan Stanley Wealth Management is
not acting as a fiduciary under either the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") or under section 4975 of the Internal Revenue
Code of 1986 as amended ("Code") in providing this material except as otherwise
provided in writing by Morgan Stanley and/or as described at
www.morganstanley.com/disclosures/dol.

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial
Advisors do not provide legal or tax advice.  Each client should always consult
his/her personal tax and/or legal advisor for information concerning his/her
individual situation and to learn about any potential tax or other implications
that may result from acting on a particular recommendation.

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. Duration, the most commonly used measure of bond
risk, quantifies the effect of changes in interest rates on the price of a bond
or bond portfolio. The longer the duration, the more sensitive the bond or
portfolio would be to changes in interest rates.  Generally, if interest rates
rise, bond prices fall and vice versa. Longer-term bonds carry a longer or
higher duration than shorter-term bonds; as such, they would be affected by
changing interest rates for a greater period of time if interest rates were to
increase. Consequently, the price of a long-term bond would drop significantly
as compared to the price of a short-term bond. 

Treasury Inflation Protection Securities’ (TIPS) coupon payments and underlying
principal are automatically increased to compensate for inflation by tracking
the consumer price index (CPI). While the real rate of return is guaranteed,
TIPS tend to offer a low return. Because the return of TIPS is linked to
inflation, TIPS may significantly underperform versus conventional U.S.
Treasuries in times of low inflation. The majority of $25 and $1000
par preferred securities are “callable” meaning that the issuer may retire the
securities at specific prices and dates prior to maturity. Interest/dividend
payments on certain preferred issues may be deferred by the issuer for periods
of up to 5 to 10 years, depending on the particular issue. The investor would
still have income tax liability even though payments would not have been
received. Price quoted is per $25 or $1,000 share, unless otherwise specified.
Current yield is calculated by multiplying the coupon by par value divided by
the market price. Some $25 or $1000 par preferred securities are QDI (Qualified
Dividend Income) eligible. Information on QDI eligibility is obtained from third
party sources. The dividend income on QDI eligible preferreds qualifies for a
reduced tax rate. Many traditional ‘dividend paying’ perpetual preferred
securities (traditional preferreds with no maturity date) are QDI eligible.  In
order to qualify for the preferential tax treatment all qualifying preferred
securities must be held by investors for a minimum period – 91 days during a 180
day window period, beginning 90 days before the ex-dividend date.  The market
value of convertible bonds and the underlying common stock(s) will fluctuate and
after purchase may be worth more or less than original cost.  If sold prior to
maturity, investors may receive more or less than their original purchase price
or maturity value, depending on market conditions. Callable bonds may be
redeemed by the issuer prior to maturity. Additional call features may exist
that could affect yield. Principal is returned on a monthly basis over the life
of a mortgage-backed security. Principal prepayment can significantly affect the
monthly income stream and the maturity of any type of MBS, including standard
MBS, CMOs and Lottery Bonds. Yields and average lives are estimated based on
prepayment assumptions and are subject to change based on actual prepayment of
the mortgages in the underlying pools.  The level of predictability of an
MBS/CMO’s average life, and its market price, depends on the type of MBS/CMO
class purchased and interest rate movements.  In general, as interest rates
fall, prepayment speeds are likely to increase, thus shortening the MBS/CMO’s
average life and likely causing its market price to rise.  Conversely, as
interest rates rise, prepayment speeds are likely to decrease, thus lengthening
average life and likely causing the MBS/CMO’s market price to fall. Some
MBS/CMOs may have “original issue discount” (OID). OID occurs if the MBS/CMO’s
original issue price is below its stated redemption price at maturity, and
results in “imputed interest” that must be reported annually for tax purposes,
resulting in a tax liability even though interest was not received.  Investors
are urged to consult their tax advisors for more information.  Asset-backed
securities generally decrease in value as a result of interest rate increases,
but may benefit less than other fixed-income securities from declining interest
rates, principally because of prepayments. Yields are subject to change with
economic conditions. Yield is only one factor that should be considered when
making an investment decision.

REITs investing risks are similar to those associated with direct investments in
real estate: property value fluctuations, lack of liquidity, limited
diversification and sensitivity to economic factors such as interest rate
changes and market recessions.

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.

Stocks of medium-sized companies entail special risks, such as limited product
lines, markets, and financial resources, and greater market volatility than
securities of larger, more-established companies.

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. 

Companies paying dividends can reduce or cut payouts at any time.

Investing in commodities entails significant risks. Commodity prices may be
affected by a variety of factors at any time, including but not limited to, (i)
changes in supply and demand relationships, (ii) governmental programs and
policies, (iii) national and international political and economic events, war
and terrorist events, (iv) changes in interest and exchange rates, (v) trading
activities in commodities and related contracts, (vi) pestilence, technological
change and weather, and (vii) the price volatility of a commodity.

Physical precious metals are non-regulated products. Precious metals are
speculative investments, which may experience short-term and long term price
volatility. The value of precious metals investments may fluctuate and may
appreciate or decline, depending on market conditions. If sold in a declining
market, the price you receive may be less than your original investment. Unlike
bonds and stocks, precious metals do not make interest or dividend payments.
Therefore, precious metals may not be appropriate for investors who require
current income. Precious metals are commodities that should be safely stored,
which may impose additional costs on the investor. The Securities Investor
Protection Corporation (“SIPC”) provides certain protection for customers’ cash
and securities in the event of a brokerage firm’s bankruptcy, other financial
difficulties, or if customers’ assets are missing. SIPC insurance does not apply
to precious metals or other commodities. Because of their narrow focus, sector
investments tend to be more volatile than investments that diversify across many
sectors and companies. Technology stocks may be especially volatile. Risks
applicable to companies in the energy and natural resources sectors include
commodity pricing risk, supply and demand risk, depletion risk and exploration
risk.

Asset allocation and diversification do not assure a profit or protect against
loss in declining financial markets. Rebalancing does not protect against a loss
in declining financial markets.  There may be a potential tax implication with a
rebalancing strategy.  Investors should consult with their tax advisor before
implementing such a strategy.

The indices are unmanaged. An investor cannot invest directly in an index.  They
are shown for illustrative purposes only and do not represent the performance of
any specific investment.

The returns on a portfolio consisting primarily of environmental, social, and
governance-aware investments (ESG) may be lower or higher than a portfolio that
is more diversified or where decisions are based solely on investment
considerations. Because ESG criteria exclude some investments, investors may not
be able to take advantage of the same opportunities or market trends as
investors that do not use such criteria. The companies identified and investment
examples are for illustrative purposes only and should not be deemed a
recommendation to purchase, hold or sell any securities or investment products.
They are intended to demonstrate the approaches taken by managers who focus on
ESG criteria in their investment strategy. There can be no guarantee that a
client's account will be managed as described herein.

This material is disseminated in the United States of America by Morgan Stanley
Smith Barney LLC.

This material, or any portion thereof, may not be reprinted, sold or
redistributed without the written consent of Morgan Stanley Smith Barney LLC.

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