We anticipate a volatile start to 2023, which could provide investment opportunities.
The global economic cycle appears to be transitioning from late expansion to downturn. But articulating the downturn’s starting point is proving very difficult.
On one hand, areas of strength include corporate earnings growth, which has been decelerating but is positive in most regions. Also, we have seen only a marginal move higher in global unemployment rates, despite slowing economic growth and aggressive monetary policy tightening. But ultimately, we expect the lagged effect of monetary policy to prevail and put additional downward pressure on earnings and economic growth.
Our take on macro drivers and major asset classes at a glance.
While we see indications of inflation having peaked, the battle has not been won. We believe the Federal Reserve (Fed) would welcome signs of labor market weakness.
A pivot toward rate cuts would likely require a recession, consistent downside inflation surprises and evidence of labor market slack.
Bouts of risk aversion could lead to strong performance for the US dollar, but country-specific catalysts could help drive returns in certain currencies.
Taking advantage of market dislocations during heightened volatility could be an effective way to potentially generate alpha in this late cycle regime.
Our recommended allocation expresses a cautious view. We believe in an opportunistic investment approach for 2023, especially when market volatility shifts valuations.
Labor market resilience has helped keep the US economy from slipping into recession.
Credit spreads appear tight at this late stage of the cycle, but benchmark yields could offer compelling compensation.
Fiscal and monetary authorities across the world want to see inflation lower, perhaps even at the expense of growth.
A steadfast ECB could counterbalance US dollar strength as the Fed’s hiking cycle comes to a pause, while hiking continues in Europe.
Tighter financial conditions, slowing nominal GDP and declining profit margins will likely lead S&P 500 consensus earnings estimates lower for calendar year 2023.
Many are anticipating a mild global downturn, but we see significant upside and downside risks to that view.
VP, Senior Macro
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