End-of-year market wrap and outlook

Across the board, interest rates have continued to rise, some company quarterly earnings have plateaued or fallen, and tensions in Eastern Europe wage on. So why the late-year rally?

Investors have surged into markets equipped with little more than expectations of a downshift in Federal rate rises. A 50-basis point increase is widely expected to come out of the Fed’s mid-December meeting due to a sharp fall in energy prices, China’s reopening, and softer CPI numbers.

Earlier last month, China tweaked its ‘zero-Covid’ policy, shortening quarantine times, decreasing flight suspensions, and relaxing secondary close contact definitions, which was received positively in markets. Record daily case numbers have since dampened sentiment around the mass return of Chinese goods on the market and placed a temporary stopper on sought-after deflation.

Brent oil prices have reverted to January levels trading at $US85 a barrel, providing much-needed reprieve to supply-driven inflation. An increase in the supply of cheap oil in the coming months looks likely, as talks of implementing the G7 Russian oil price cap have resurfaced and aim to put a ceiling price of $US65 and $US70/barrel on Russian oil.

Inflation is still peaking

The second half of 2022 has been steadfast in Australia with slow and steady post-pandemic economic recovery after a lacklustre 2021. While the Australian economy has come out of the pandemic in a strong position, the global economy continues to labour out of the slumber.

Setting the scene for where we’ve been over the past few months, inflation remains high among most economies internationally with central banks quick to raise interest rates. While the RBA has announced a plan to return inflation to the 2-3 per cent mark over time, headline inflation is peaking around 8 per cent at the end of 2022.

As we edge towards the end of the year and look ahead to 2023, we’re all wanting a quicker turn for the best. However, it’s important to hold a long-term, enduring outlook amid a backdrop of low bond yields, rising interest rates, falling house prices, and a volatile share market.

Markets continue to (attempt) recovery

In the US, while the Fed may look to downshift the speed of rate rises, experts unanimously agree that sticky services inflation will be harder to shake than expected.
Tight labour markets continue to exacerbate the issue and will do so for as long as there are more Baby Boomers exiting the workforce than younger Australians looking to part ways with their reliance on government stimulus.

While we are conditioned to expect a relaxation of monetary policy in times of economic downturn, central banks are unlikely to pivot and reverse the course of rate rises at the first signs of economic softening.

Lead economists from Goldman Sachs and Morgan Stanley have independently reached consensus, both postulating a fall in the S&P 500 in early 2023 as rate rises take flow on into corporate earnings, before the market recovers ending the year relatively flat.
Tactical capital allocation in line with investors’ strategic objectives is paramount during these times of market volatility.

Investors should look to value stocks for long-term performance, with many placing larger-than-normal importance on high dividend growth, robust balance sheets, and strong margins as positive indicators.

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