Where Next For Markets?

​As 2022 draws to a close, markets have rallied on hopes of slower inflation and a softening of interest rate policy by the US Central Reserve Bank. However, much more evidence of slowing inflation will be needed before we see any loosening of monetary policy.
At some point in 2023, it is hoped we will see inflationary pressures easing, a peak in US interest rates, and fears of a deep economic recession subsiding. It is not a question of if, but when.
Long-term investors who adopt the philosophy of ‘time IN the markets, not TIMING the markets’ should eventually be rewarded. It is much trickier to know when to go back into riskier assets from cash, than to come out of them so we continue to advise that clients remain invested and stay patient.
After all, if the alternative is cash, bank interest rates remain well below actual inflation numbers, leading to an erosion of purchasing power. Not a long-term solution.
That is not to say, we do not expect further market volatility in the coming months. Weaker company profits and adverse macro-economic data continue to be reported on the one hand, but on the other, we saw better than expected inflation data in the US recently which sparked a sharp rally. Volatility is the short-term watchword at least for the time being, but if you are not invested, those rallies will be missed.
Historically, markets have tended to bottom once interest rate cuts are on the cards, but investors need more assurances that inflation has peaked and is falling back to a ‘normal’ range. History also tells us that markets tend to turn for the better before the bottoming of an economic cycle as investors position themselves for an anticipated recovery. This is where investors can be too late coming to the party if they are sitting on cash.
Exactly when markets start to anticipate a better growth outlook will depend on a number of factors, and notwithstanding any unforeseen events, be they geo-political, economic, or otherwise.
OutlookAn appetite for riskier assets may intensify as 2023 evolves but before that, we can probably expect further market volatility. We will need to see interest rates peak and recede, and a bottoming of corporate earnings and economic data. This is also likely to lead to a softer US Dollar valuation. What history has told us is that equities should outperform most asset classes, and at least provide growth above inflation. Time IN the markets!