Key changes from April report:
- No changes
Stocks resumed their downward trajectory from earlier in the year as the S&P 500 Index slipped 8.8% in April, the worst April for the index since 1970. The loss, driven primarily by inflation and Federal Reserve rate hike fears, left the equity index down 13.3% year to date as of April 29. The lack of any progress toward a peaceful resolution in Ukraine, fresh COVID-19 lockdowns in China, and an inverted 2 year/10-year Treasury yield curve added to investor nervousness.
One of the most difficult periods in history for the bond market got worse in April, as the 10-year U.S. Treasury yield spiked more than 60 basis points (0.6%) during the month and investment grade and high-yield bond credit spreads widened.
The Strategic and Tactical Asset Allocation Committee (STAAC) made no asset allocation changes for May, following what was a very active month of changes in April. Our S&P 500 Index fair value target range remains at 4,800—4,900, based on a price-to-earnings ratio (PE) of 20.5 and our 2023 earnings per share (EPS) estimate of $235. We expect the 10-year Treasury yield to pull back to the 2.5% range by year-end, though in the near term the peak may not be in.
- The STAAC continues to favor stocks over bonds as it believes generally positive fundamentals outweigh pressure on valuations.
- Our value and growth style views remain neutral for now. Watch for slower economic growth, a flat yield curve, stable or falling overall interest rates, and solid earnings gains to potentially propel a growth turnaround in the second half.
- As the economic cycle matures, we would expect large caps to resume leadership, though attractive valuations and a U.S. focus may provide support for small caps in the near term.
- The STAAC suggests a modest underweight to fixed income relative to investors’ respective targets, as appropriate, as higher interest rates may put additional pressure on bond returns.
- Although we’ve seen a meaningful move higher in yields this year, broadening inflationary pressures and the reduction of Federal Reserve (Fed) policy support may push yields still higher in the months ahead. We’ve increased our yearend target for the 10-year Treasury yield from 2.25% to 2.5%.
- Shorter maturity corporate credit and high yield bonds (for income-oriented investors) are starting to look more attractive.
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