- Markets have seen six weeks of losses in the face of mounting pressures and declining sentiment.
- Risks have dominated recent news – including inflation in the US, another round of lockdowns in China, and ongoing war in Europe
- Disciplined investors have been tested – but may stand to see some relief as these risks subside over time
Global indexes are showing some signs of relief this morning following several difficult weeks of significant downward pressure. Despite indications that the inflation rate has seen a meaningful deceleration, the overall levels remain high, and sentiment among investors, businesses, and consumers continues to lag. While efforts from the US Federal Reserve and other central banks to combat inflation will take time to cool economic activity, fears persist in some quarters that these efforts may reach too far, too fast.
With the pressure building, it is easy to lose track of the positive factors still in play just under the surface of the rising floodwaters. US employment figures remain robust, with jobless claims hovering at near-record lows, even as participation rises. Real estate values, though slowed by increasing mortgage rates, remain strong after several years of strong gains; this continues to boost household wealth. Corporate earnings, while still growing at a more normal rate than in previous quarters, remain favorable despite significant pressures from energy prices and other input costs. As asset prices fall, all of these features should, at some point—possibly soon—provide a floor for markets to stand on.
Will the economic forces that drive growth power through the current storm, or is an actual recession in the cards for 2022? The answer depends on a combination of factors—most of which likely support continued growth, even if at a reduced rate. Energy costs, for instance, should moderate as new sources are engaged to meet global needs despite war in Europe. Supply chain bottlenecks should improve as China emerges from the latest wave of pandemic lockdowns, improving both supply and demand in the world’s second largest economy. In the US, consumer activity should surge this summer as people reengage with travel and leisure plans and prepare for a more normal school year this fall. Massive economic forces remain poised to forge ahead, regardless of whatever short-term obstacles impede progress today.
Maintaining discipline and weathering the difficulties we are facing today remain as challenges for all investors. Recognizing that the balance of factors includes many positive features may be cold comfort for portfolios suffering from lower market values. But the opportunities ahead should be viewed from where we are today. While every scenario is different, market history suggests that recoveries can be abrupt, and opportunities may be fleeting—and we recommend continued perseverance at this time.