- Fiscal drag, a higher dollar and higher interest rates should slow U.S. economic growth and inflation, although widespread pent-up demand still makes a soft landing more likely than near-term recession.
- The U.S. midterm elections are likely to result in divided government, reducing the chances of any further fiscal stimulus.
- While the Federal Reserve is likely to continue to tighten policy throughout 2022 and into 2023, its tone should become less hawkish as both economic momentum and inflation fade.
- Most of the damage to the bond market should be behind us for this cycle, and higher rates and credit spreads are opening up some better fixed income opportunities.
- U.S. equity valuations look more reasonable but are being pressured by higher rates, suggesting a need to focus on those companies best able to sustain margins in a slowing economy.
- The short-term international economic outlook depends on Europe’s ability to weather the disruption caused by the war in Ukraine and China’s success in suppressing COVID-19 while gradually moving away from lockdowns.
- Attractive valuations, solid earnings performance and prospects for a dollar decline all favor international equities as the impact of COVID-19 and Ukraine hopefully fade in the months ahead.
- Valuations look significantly more attractive than at the start of the year in both global equities and fixed income. However, with long-term prospects still looking mediocre for broad equity and fixed income markets, investors may want to look to some alternatives, ESG strategies and active management to boost portfolio returns.
The first half of 2022 has seen the U.S economy buffeted by multiple shocks including further pandemic waves, significant fiscal drag and the impacts of both China’s “zero-COVID-19” policy and the Russian invasion of Ukraine. In considering how the economic and financial landscape might evolve over the rest of 2022 and beyond, it seems logical to look at these shocks one by one and then consider what they might mean for U.S. economic growth, jobs, inflation, Federal Reserve policy and the dollar.