ACG Market Review – Q4 2022

Global Highlights

Economy – Resiliency in light of recessionary risks as inflation wanes and the Federal Reserve continues to tighten policy
Equities – Some relief in Q4 during a difficult year with focus turning to earnings growth amid the possibility for a recession
Fixed Income – Higher yields led to one of the worst years ever for bond investors, but forward expectations have greatly improved

Inflation Fears Shifting to Recession Fears

2022 will likely be remembered as an inflection point for low inflation and easy monetary policy into a new regime of elevated inflation and hawkish Federal Reserve (Fed) policy. The year began with annual inflation running well above the Fed’s stated 2.0% target and with debate around when and how fast the central bank would raise its policy rate. Ultimately, the Fed hiked rates seven consecutive times to end the year with a policy rate of 4.5% from a starting point near zero. Year-over-year inflation peaked around 9.0% amid the policy turn and showed signs of slowing during Q4.

Many of the inflationary drivers post-pandemic have recently flipped to deflationary forces which has helped slow price-growth in the short-term. Among other factors contributing to inflation, expansive monetary and fiscal policy, stressed supply chains, and the war in Ukraine all caused significant upward pressure on prices in the two years after COVID. These factors generally reversed in the second half of 2022 to provide relief in the near-term. The Fed began tightening financial conditions, government stimulus in response to the pandemic has largely rolled off, supply chains have begun to normalize, and the initial spike in food and energy prices due to geopolitical conflict has abated. As inflation concerns have peaked, market focus has turned towards recession odds.

The base-case for many economists looking ahead to 2023 is for some form of recession. A Bloomberg survey in December showed that over 80% of economists are expecting a recession in the next 24 months. In evidence of a looming recession, data points such as the Index of Leading Economic Indicators and the Global Purchasing Managers Index have fallen into contractionary territory. There does seem to be hope in some pockets that the U.S. can avoid recession and experience a “soft landing” or a mild slowdown without the normal recessionary pain. GDP based on the Federal Reserve Bank of Atlanta’s GDPNow estimates are showing approximately 4.0% growth in Q4 2022 after negative growth in the first half of the year. Consumer spending and excess savings rates have also generally remained resilient and point to some baseline support for the economy.

The natural cycles of the economy dictate that a recession is on the horizon at an undetermined distance. One of the big questions for markets looking ahead to 2023 is how much recession risks have been priced into asset prices. Fixed income markets have largely priced-in recession with inverted yield curves betting the Fed will need to begin cutting rates soon. The interplay between inflation, rates, and recession risk largely drove markets in 2022 and will continue to be closely watched next year…

Continue reading by downloading the full report HERE which includes exhibits and sections that discuss:

Signs of Life for Equities During Tough Year
Bond Market Reset
Prediction Season
Market Index Review – December 2022
Q4 2022: “Fed Watching” Becomes The New National Pastime
Focus of Investor Worry Shifts from Inflation to Recession
Equity Market Performance Around Inflationary Peaks
Looming Recession Keeps Market On Edge
U.S. Economy Resilient & Confidence May Be Bottoming Out
Earnings Growth Deteriorating But Still Positive
2022 Equity Returns Driven by Valuation Declines
The Equity Market is Bifurcated
Relative Valuations
Bond Yields Reach Decade Highs
What Will 2023 Have In Store?
What About the Next 10 Years?