Future uncertainty still warrants a cautious approach to equities, but an environment of moderating inflation and resilient growth could support greater stability in the stock market in the interim.

Meera Pandit
Global Market Strategist
Hi, my name is Meera Pandit, global market strategist at JP Morgan Asset Management. Welcome to On the Minds of Investors. Today's topic, just how bad or good is economic growth? This has been a year of conflicting signals on economic growth. The first two quarters of 2022 posted negative real GDP growth, prompting concerns about recession, but third quarter real GDP growth was just revised up to 2.9% due to better consumption, business fixed investment, and trade figures.
Swings in the first three quarters can mostly be attributed to trade and inventories muddying the picture of how healthy the economy truly is. The chorus of recession calls for 2023 has continued, but recent economic data has actually surprised to the upside. The Atlanta Fed's real GDP tracker is currently forecasting 2.9% quarterly growth in the fourth quarter and the Citigroup Economic Surprise Index, which looks at data surprises based on actual data releases versus the Bloomberg median survey, has been positive since mid-September, indicating that economic releases have been beating consensus expectations.
Still, the economy has likely headed towards a slowdown in 2023. Forward-looking indicators, like the yield curve, which is deeply inverted, and the leading economic indicators index, which has fallen for eight consecutive months, suggests that recession could be on the horizon.
However, we are not there yet and the prevailing economic resiliency coincides with softening inflation, which gives the Federal Reserve an opportune window of slowing inflation but solid growth to tighten monetary policy to an appropriately restrictive stance and maintain that level for a period of time before growth starts to bite. This is an enviable position. The European Central Bank and the Bank of England are battling double-digit inflation against meager growth.
For investors, US yields may need to nudge higher in the short term to reflect more supportive growth conditions and a Fed that has not yet reached its destination. Future uncertainty still warrants a cautious approach to equities, but an environment of moderating inflation and resilient growth could support greater stability in the stock market in the interim.
This has been a year of conflicting signals on economic growth. The first two quarters of 2022 posted negative real GDP growth, prompting concerns about recession, but third quarter real GDP growth was just revised up to 2.9% quarter-over-quarter (q/q) seasonally adjusted annual growth rate (saar) due to better consumption, business fixed investment, and trade figures. Swings in the first three quarters can mostly be attributed to trade and inventories, muddying the picture of how healthy the economy truly is.
The chorus of recession calls for 2023 has continued but recent economic data has surprised to the upside. The Atlanta Fed’s real GDP tracker is currently forecasting 2.8% q/q saar growth in the fourth quarter. The Citigroup Economic Surprise Index, which looks at data surprises based on actual data releases versus the Bloomberg survey median, has been positive since mid-September, indicating that economic releases have been beating consensus expectations. Still, the economy is likely headed towards a slowdown in 2023. Forward-looking indicators like the yield curve, which is deeply inverted, and the Leading Economic Indicators index, which has fallen for eight consecutive months, suggest that recession could be on the horizon.
However, we are not there yet. The prevailing economic resiliency coincides with softening inflation, which gives the Federal Reserve an opportune window of slowing inflation but solid growth to tighten monetary policy to an appropriately restrictive stance and maintain that level for a period of time before growth starts to bite. This is an enviable position; the European Central Bank and the Bank of England are battling double-digit inflation against meager economic growth. For investors, U.S. yields may need to nudge higher in the short-term to reflect more supportive growth conditions and a Fed that has not yet reached its destination. Future uncertainty still warrants a cautious approach to equities, but an environment of moderating inflation and resilient growth could support greater stability in the stock market in the interim.
Citigroup Economic Surprise Index points to resilient U.S. economy
Source: Citigroup, J.P. Morgan Asset Management. The Citigroup Economic Surprise Indices (CESI) are objective and quantitative measures of economic news. They are defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance [been] beating consensus. The indices are calculated daily in a rolling three-month window. The weights of economic indicators are derived from relative high-frequency spot FX impacts of 1 standard deviation data surprises. The indices also employ a time decay function to replicate the limited memory of markets. Data are as of November 29, 2022.
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