On Air with Altair: 2Q 2022 Market Review Video
Want to hear Altair’s analysis of the markets, but do not have the time to read all of Altair Insight? Watch our video summary of the report or listen to the podcast episode and get caught up on our market review in 4 minutes.
NAVIGATING AN ECONOMIC SLOWDOWN
Both the economy and markets have been weakened this year by the three i’s – inflation, interest rates and invasion (the last one referring to Russia’s war in Ukraine). All those factors remain present and weigh on the outlook, but we are still constructive on what lies ahead.
U.S. growth has gone temporarily flat as the economy downshifts amid higher prices and borrowing rates. But amid that slowing, recent data shows the economy is still stable. The labor market is solid, consumer spending is still heavy, households are in good position to ride out a downturn, and overall corporate earnings are still growing.
We believe the economy is in good position to withstand higher interest rates and the impact of inflation over the next several months.
A CHANGING INFLATION OUTLOOK?
Now, inflation is proving stickier than most foresaw. So-called headline inflation rose to a 41-year high of 9.1% in June because of the soaring costs of gasoline as well as food, shelter and other services.
Yet more recent data offer some encouraging signs. Energy and commodity prices have fallen, supply chain pressures have eased and other areas also are cooling.
But we remain wary of inflation’s unpredictability, as well as its powerful impact on the economy and markets.
The longer it remains elevated, the greater the public’s expectations for cost increases become anchored – which potentially risks creating a longer-term spiral of price and wage increases.
Certainly, a moderation of inflation in the second half – which we expect – would be a step in the right direction.
FED’S FIGHT VS. INFLATION
The Federal Reserve is trying to make up for lost time in its inflation fight.
Its late-starting campaign to bring rapid price growth under control appears to be working its way through the system as the housing market and other overheated sectors cool down.
With its latest rate increase, it appears on pace to bring the federal funds rate up to about 3% in September.
That could enable it to ease its tightening sooner than expected, which has the potential to boost markets.
We believe Fed officials need to see two to three months of moderating inflation before letting up. If that occurs, they could pull a surprise by pausing or even ending the tightening process ahead of expectations.
With the economy slumping, 2022 has been a poor year for investors so far. But assuming the economy avoids a severe recession – which we see no signs of – we believe this market decline is closer to the end than the beginning.
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