On Air with Altair: 3Q 2022 Market Review Video
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The Federal Reserve’s steep tightening of interest rates remains the driving force behind markets’ poor performance this year. Fed Chair Powell and his colleagues have made it very clear that they must keep at it until the job is done. That likely means their aggressive approach will continue through year-end. A pause is possible in coming months, but only with clear evidence of a meaningful drop in inflation. We do think the Fed’s harsh ramp-up is in the late innings. And therefore the rate hikes should ease in the first half of 2023.
SIGNS OF INFLATION SLOWING
Core inflation as gauged by the Consumer Price Index or CPI rose in August and September to reach a 40-year high of 6.6% year-over-year. Yet looking beyond the CPI, which is a lagging indicator, we see encouraging signs of prices heading in the right direction. Other indexes are trending to lower inflation, which will ultimately show up in future CPI readings as the Fed’s rate cuts work their way through the system. According to a recent survey, small businesses believe the worst of the price growth is over. Manufacturers are reporting a deceleration in price growth. And the market’s inflation expectations have been trending lower since March. We expect inflation to show increased signs of deceleration in the months ahead.
GLOBAL ECONOMY WEAKENING BUT GROWING
Given this year’s triple whammy of high inflation, rapid monetary tightening and the Ukraine war, the global economy has held up relatively well. The International Monetary Fund, while warning that “the worst is yet to come,” still projects 2.7% global GDP growth in 2023 despite the likelihood of recessions in some countries. The United States, too, faces challenges but does not appear headed for a deep slump in our view. The labor market remains the economy’s linchpin, surprisingly strong even as the number of job openings cools from the blazing-hot level of earlier this year. Despite tepid growth, economic indicators as a whole suggest that any recession that takes place will be modest and relatively brief. And most importantly for investors, it may already be priced into today’s battered stock and bond prices.
High inflation, rapid monetary tightening and the Ukraine war have made this a challenging year for the economy and a terrible one for markets. However, we believe that the economy will avoid a severe recession and that most of the damage to markets has already been done. We look forward to recovery in 2023.
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