Recession fears are mounting, growth is slowing, equity markets are in bear territory, and the Fed is aggressively raising rates to combat inflation. Despite the headwinds consumer and labor markets remain strong, which we think can help capital markets can stabilize in 2H22.
KEY POINTS
Normalizing growth and inflation
- Inflation may have peaked and if it starts to slow would remove a significant headwind for markets and the economy.
- US GDP growth is likely to be negative (again) in 2Q, but given strength in labor markets and consumer spending a recession may not be declared.
- The Fed’s aggressive tightening policies are weighing on public markets, but with strong labor markets we see potential for the economy to absorb the shock for a “soft landing”.
- Most major equity indices fell into bear market territory in 2Q22 (down 20%+), which now presents a compelling buying opportunity for investors.
- Our updated Major Asset Class Views reflect opportunities in public equities following the 20% decline, as well as high quality fixed income which has been dragged down with the broader fixed income market.
Exhibit 1:
Key Markets Performance in 2Q22
Equity markets experienced their worst first half year performance since 1970. The key topic on everyone’s mind remains inflation, especially consumers who are feeling the impact of higher prices every day at the gas pump and in grocery stores. In our last newsletter we noted the underlying economic strength in the US in face of volatility, global tensions (including war in Russia/Ukraine) and persistent inflation. We continue to advocate that the US economy is on solid footing, but acknowledge that with every passing headline about recession and layoffs the risk of a recessionary self-fulling prophecy increases.
As we enter the back half of 2022 the headwinds the economy faced earlier in the year remain: inflation, slowing growth, a less accommodative Fed, and spillover effects from Russia/Ukraine. At the same time we see green shoots of hope: inflation may have peaked, consumer activity is robust, and the labor market is strong.
Exhibit 2:
Consumer Spending
The biggest risk to our view is if inflation remains elevated and consumer spending slows, all while the Fed continues to aggressively hike rates; In such a scenario we see the potential for a deep recession. The key data point we are watching remains inflation – if inflation starts to soften then we see the potential for the Fed to slow its hawkish policy, which should ease recessionary concerns. In such a scenario we think markets would react sharply positive, especially P/E multiples which have contracted sharply to 16x (from 22x at the beginning of the year).
We advocate for our clients to use environments like today to take advantage of market dislocations, and strategically deploy capital to build generational wealth. We recognize the difficulty in doing this, which is why we emphasis being strategic when deploying capital and following a long-term plan. For those who can withstand the volatility and look past the noise there are opportunities for growth ahead.
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ENDNOTES
Disclosures
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.