Although we are only currently in October, investors are now starting to look ahead to 2023, as it’s likely to set the scene for subsequent years.
2022 has been all about the Russia/Ukraine war, energy costs, inflation, and interest rate increases. This year, the US Federal Reserve has increased interest rates from near zero to 3%–3.25% — the highest levels since 2008 — in an effort to bring down inflation. And we are likely to see more rate hikes before the end of the year. At present, analysts expect the Fed to increase rates by another 100–125 basis points in 2022.
So, what will we see next year? Will the aggressive rate hikes from the world’s central banks lead to a recession? Or is the global economy strong enough to get by in a world of higher rates? The truth is, no one really knows at this stage. Right now, there’s a great deal of economic uncertainty. Having said that, the inverted yield curve in the US suggests that many people believe a recession is likely in the near future.
The fourth quarter of 2022 will start with US corporate earnings. This may give us some indication of what to expect going forward. If earnings are lower than expected, due to inflation or a weakening consumer, for example, we may see more stock market volatility in the short term. However, if earnings are robust, stocks should hold up.
In the current environment, government bonds are actually an alternative to equities. However, equities may have already priced in a lot of bad news. Therefore, going forward, we could potentially see surprises to the upside. As always, investors should consider both risk and reward when assessing opportunities, and ensure that their portfolios are well- diversified to manage risk
I wish you all the best for the quarter ahead.
Gil Shapira
Gil ShapiraChief Investment Officer
