It’s been more than three years since the pandemic began, and thankfully the worst is behind us, but the global economy is still dealing with the ramifications of COVID. Debates remain on whether a recession is upon us or not and how deep it could be, while economic data continues to be mostly positive. Last quarter, we wrote about one of the negative implications of the fast tightening of monetary policies by the Fed which contributed to the failure of a few banks which were especially vulnerable. This created some social and market anxiety about the safety of deposits and potential systemic contagion, that have now stabilized, as we thought they might.
Whistling Past the Graveyard or Perfect Foresight?
Whatever happened to the old saying “don’t fight the Fed”? Typically, when the Fed and other central banks raise interest rates to cool inflation, an associated and necessary result is economic activity and corporate earnings slow, so equity markets sell off in response. But year-to-date the global benchmark All Country World Index (ACWI) has returned almost 10% and has largely ignored the fact that we are still in the midst of the most aggressive monetary tightening cycle since the 1980s. Starting in the first quarter of 2022, the central banks of the G10 largest economies have increased policy rates by a whopping 24% in aggregate. Meanwhile, central banks are also withdrawing stimulus through their quantitative tightening programs. But all the while stock markets have spent 2023 so far merrily (or recklessly?) marching higher.
Q1 2023 Market Outlook
Q4 2022 Market Outlook
Until recently, we had been living in a decade-long easy money environment marked by low interest rates and a strong economy. We saw significant appreciation in many different types of assets driven by an insensitivity to valuation. The music stopped in 2022 when central banks around the world started raising interest rates in a concerted effort to fight global inflation.
The Storm Before the Calm?
We don’t think we are alone in saying that we will be happy to have 2022 in the rear-view mirror. This was a year filled with pervasive and relentless unrest, conflict, and sorrow. In 2022, Orwellian propaganda, doublespeak, and outright disinformation policies continued to spread around the globe. When the Merriam-Webster dictionary selects “gaslighting” as the word of the year – you know it was an unpleasant year.