At some point, we will witness the plateauing of inflation, as well as prices easing as global supply chains untangle. When professional portfolio managers begin to see the backdrop improve, even at the margin — or get less bad — they typically begin to build their positions in attractively valued stocks.
3. What chance of a recession do you think there is today, and to what extent has the (equity) market already discounted a recession?
The market has not yet discounted a recession, certainly not for 2022. With the labor market still strong, there is an ongoing debate about whether we are experiencing a slower growth environment instead of moving towards a recession. Much will depend on how much more aggressive the Fed will need to be to bring inflation to levels commensurate with price stability.
4. Do you think the markets are oversold, and where do you see the major indexes ending 2022?
Markets have been wavering between overbought and oversold conditions, with each scenario leading to bouts of selling or increased buying. This should be expected amid a backdrop of uncertainty with regard to inflation, supply chain constraints, the path of interest rate hikes and the effects on corporate earnings.
5. What should advisors be telling clients at midyear?
At midyear, advisors should help clients understand that we’ve been through difficult cycles before and the market invariably heals and climbs higher. During this particular downturn, the market is adjusting to higher interest rates and finding an equilibrium in terms of valuation. It is a process, but one that leads to an attractively valued market that has discounted interest rates, corporate profits and the economic backdrop.