Quarterly Market Outlook and Review: Q2 2022
The second quarter proved to be yet another difficult quarter for investors as equity and bond market volatility persisted. The S&P 500 had its worst start to the year since 1970, falling 20.6% in H1 and officially entered a bear market. While this year’s downturn started off like your traditional correction, with sharp sentiment driven declines in Q1, global economic conditions have worsened quite substantially since. Russia’s invasion of Ukraine has resulted in surging food and energy prices exacerbating the global inflationary problem and leading central banks to hike interest rates at an even more accelerated pace than initially anticipated.
Markets continue to be plagued by the same fears we touched on in our June Market Review and it is unsurprising that volatility remains high with markets grappling with these various challenges. However, following poor equity returns in June, after a 75bps interest rate hike by the Fed, equity markets now seem to be pricing in at least some form of mild recession; a technical recession is a real possibility following Q1’s GDP contraction. The big question is whether or not growth rebounds in the second half of this year as inflation moderates allowing the Fed to take its foot off the accelerator and navigate a ‘soft’ landing, whereby unemployment and credit losses remain low. This is our base case and we touch on why later in our market outlook. Alternatively, a scenario exists in which the Fed is forced to continue tightening financial conditions to bring sticky inflation down whilst the economy contracts and unemployment rises, causing a more drawn out recession, or ‘hard’ landing.
Across the pond, in the UK and Europe, we have seen consumer confidence levels fall to record lows as the cost-of-living crisis intensifies; real wages are falling while food, fuel and gas prices rise. The European economy faces an additional risk from the potential reduction in gas supplies from Russia which could result in outright shortages and rationing in the winter if things continue. Government subsidies will ease some of the pain but the outlook for peak inflation in the UK and Europe is, therefore, less optimistic than in the US given their energy dependence, which results in imported inflation. However, we still expect inflation to moderate in the second half of this year and come down to more normal levels in 2023.
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