The crucial short-term question is whether markets have sufficiently priced in a negative outlook or even priced in too negative an outlook . Unsurprisingly , perhaps , this question is difficult to answer and partly explains why we have also had large positive up days almost one day out of five this year , compared to a historical average of one day out of seven .
So , is the market any closer to getting to the right answer ? In our view , today , market expectations are now more realistic about the future path of interest rates and consequently it is less clear whether the interest rates hiking cycle will surprise on the up or downside compared to current expectations , especially as we regard a highly inflationary outcome as less likely than more positive news-flow taking place .
At the start of the year , financial markets were not priced for aggressive interest rate increases and below-trend growth . Then , most market participants felt global inflation would not persist as a problem as global supply chain constraints would ease and demand would shift from goods to services .
In practice , inflation has stayed elevated from the energy supply shock from the war in Ukraine and supply chains have remained disrupted from persistent Chinese COVID-19 lockdowns , while the interest rate response from central banks – working with a lag – has yet to take effect on excess demand .
The risk now is that markets have gone too far the other way and are expecting too negative an outcome with inflation and interest rates . Consequently , investors could be rewarded for holding equities from here if things turn out better than expected .
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The crucial shortterm question is whether markets have sufficiently priced in a negative outlook or even priced in too negative an outlook .
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PPS takes a long-term perspective on how we invest our members ’ assets . We know this requires us to have meaningful exposure to equities through the investment cycle , even at times when it might be uncomfortable in the short term . While our portfolios hold somewhat more cash than we would in a less uncertain environment , we remain significantly invested .
Markets today have already priced in a negative outlook and while conditions might always deteriorate in the short term , we would use this opportunity to add to weakness . At the same time , as a multi-manager , we also strive to ensure our portfolios are well-diversified across managers and markets , and we have the appropriate combination to deliver consistent returns to our clients over the long term .
Disclaimer : Kindly note that this does not constitute financial advice . The information provided is purely informational . The information , opinions and communication from the PPS Group or any of its subsidiaries , whether written , oral or implied , are expressed in good faith and not intended as investment advice , neither do they constitute an offer nor solicitation in any manner .
David Crosoer
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