SEATTLE–(BUSINESS WIRE)–Russell Investments strategists believe that ultimately, the slowdown in underlying inflation should allow the US Federal Reserve (Fed) to suspend in early 2023, and oversold sentiment in stock markets means that a lot of bad news is already priced in.
“It’s hard to find a lot of good news right now, but one source of comfort is that investor sentiment is very negative,” he said. Andrew Pease, Global Head of Investment Strategy at Russell Investments. “We think this is reassuring that markets have priced in the bad news so far.”
Pease added that his team’s Composite Sentiment Index – which measures investor sentiment for the S&P 500® via a range of technical, positioning and survey indicators – is currently close to two standard deviations oversold.
While Pease isn’t ready to predict that a recession is the most likely outcome for the US economy in 2023, he thinks the likelihood is growing. He said the main warning comes from the inverted Treasury yield curve, where the spread between the 10-year yield and the 2-year yield is the most negative in 40 years. Additionally, some of the leading indicators for the US economy, such as the Institute for Supply Management’s New Orders Index, have weakened.
Pease added that the Fed is focused on indicators such as payrolls and wages, which remain overheated, and these labor market trends tend to lag the economy as a whole. This, he said, creates the risk that the Fed will continue to tighten as the economy weakens.
“We are still in soft/soft landing camp for the United States, and we expect strong household and business finances to limit the downturn to, at worst, a mild recession,” said Pease.
Regarding the outlook for Europe, the team expects a difficult winter. Strategists believe that high energy costs will depress consumer spending and industrial production, while persistently high inflation will likely lead to continued tightening by the European Central Bank. “With measures of industrial production beginning to decline in response to high energy prices, it’s hard to see the region avoiding at least a mild recession,” Pease said.
Russell Investments’ cycle, value and sentiment investment decision-making process provides a neutral view of the outlook at the start of Q4 2022. Firm strategists summarize their current investment preferences of asset classes as follows:
- Non-U.S. Developed Equity are preferred over US stocks because they are relatively cheaper and will benefit from US dollar weakness if the Fed becomes less hawkish. “Our valuation methodology doesn’t view US stocks as cheap, but value has improved,” Pease said.
- Emerging Markets Equities could rally if there is significant stimulus from China, the Fed slows the pace of tightening, energy prices fall and the US dollar weakens. For now, the team feels a neutral stance is warranted.
- High performance and prime credit spreads are close to their long-term averages, and the team sees the overall US high yield return at around 8.5% as attractive. “Spreads will remain under upward pressure if the odds of a US recession increase,” Pease said. “We have a neutral outlook on credit markets, but will become more positive if a US recession becomes less likely.”
- State bond valuations have improved and the team believes that US, UK and German bonds offer good value. They consider that Japanese bonds remain expensive. “Yields have risen sharply in most markets in recent months, and the risk of another big sell-off appears limited given that inflation is close to peaking and markets have set a hawkish outlook for the most central banks,” Pease said.
- Real goods: Global Listed Infrastructure (GLI) has been one of the best performing asset classes so far this year, while Real Estate Investment Trusts (REITS) have lost more than 20%. The team views GLI as expensive on several measures, including dividend yields and price-earnings ratios. In contrast, REITS are showing good value on these metrics. In commodities, which are still the best performing asset class so far this year, the team sees upside potential for a recovery in Chinese demand in 2023 as policy measures lockdowns ease and more stimulus is enacted.
The American dollars has made gains this year thanks to the ferocity of the Fed and the call for safe haven during the Russian-Ukrainian conflict. However, the team believes that it should weaken if inflation starts to decline and the Fed adopts a less hawkish stance in early 2023. In this scenario, strategists expect the euro and the Japanese yen are the main beneficiaries..
For more information, please consult the team Global Market Outlook 2022 – 4th Quarter Update
About Russell Investments
Russell Investments is one of the world’s leading investment solutions companies offering a wide range of investment capabilities to institutional investors, financial intermediaries and individual investors worldwide. Building on an 86-year legacy of continuous innovation to deliver exceptional value to its clients, Russell Investments works every day to improve the financial security of its clients. The company has $299.2 billion in assets under management (as of 06/30/2022) for clients in 32 countries. Headquartered in Seattle, Washington, Russell Investments has offices in 19 cities around the world, including New York, London, Toronto, Tokyo and Shanghai.
Forecasts represent predictions of market prices and/or volume patterns using various analytical data. It is not representative of a stock market projection, or of any specific investment.