Q3 2022 Global Market Outlook

It’s been a tough first half of the year, with the MSCI All Country World Index down by 21.7% and the Bloomberg Global Treasury benchmark losing about 9% as of June 17. Markets have faced a laundry list of concerns. These include new COVID-19 lockdowns and an economic slowdown in China, the Russia/Ukraine war, surging inflation and central-bank tightening.

These issues are at least well understood now by markets. At the beginning of the year, it was unclear how far inflation would surge and how aggressively central banks would respond. There was little expectation that Russia would launch a full-scale invasion of Ukraine. The war has now happened, core inflation looks to be peaking in the U.S. and markets are pricing relatively aggressive tightening paths for most central banks.

Our composite sentiment index—which measures investor sentiment for the S&P 500® via a range of technical, positioning and survey indicators—is deeply oversold. This provides some reassurance that markets have accounted for the bad news so far and could recover if inflation and growth turn out better than currently feared.

Of course, it’s possible that investors will panic and reach a sell-everything capitulation point. We saw this in March 2020 during the COVID-19 selloff. The lesson from previous market corrections, however, is that periods of panic can provide the best opportunities for longer-term investors.

The main uncertainty is the outlook for the U.S. economy. The pace and magnitude of U.S. Federal Reserve (Fed) tightening creates the risk of a recession by the second half of 2023. A deep recession could trigger a larger equity bear market. We think a slowdown or mild recession are the two most likely outcomes. U.S. household and business balance sheets are in good shape, and these should protect against a more severe downturn.

The upside risk for the U.S. economy and markets comes from the possibility that U.S. core inflation has peaked. This, combined with some softening in the labor market, could allow the Fed to become less hawkish in the second half of the year.