Challenges More Persistent Than Expected

At the mid-year point, the challenges facing stock markets have proven stronger and more persistent than expected, says Picton Mahoney’s ‘Q3 2022 Investment Review and Outlook.’ At the beginning of 2022, it made the case that equities would struggle against a trifecta of headwinds: uncomfortably high inflation, a hawkish Fed, and decelerating economic growth. However, these headwinds would eventually dissipate and turn into tailwinds for stocks, setting the stage for a new rally in risk assets. Yet, inflation has remained stubbornly high, exacerbated by Russia’s invasion of Ukraine and ongoing supply chain bottlenecks. With upward pressure on prices driving headline Consumer Price Index (CPI) numbers to 9.1 per cent in June, the U.S. Fed has been forced to take an even more hawkish stance on monetary policy in order to rein in the demand side of the economy. Risk assets, long accustomed to an accommodative Fed, have been shaken by the speed at which the central bank is taking away the punchbowl, it says. As it stands today, there has not been any real improvement at the margin with regard to those three key headwinds. This has made it very difficult for investors to feel much optimism or to embrace buying equities, even as their prices become more attractive.