Equity markets sold off this week as concerns over inflation and economic weakness weighed on risk assets. Bonds were marginally lower, and the yield curve has inverted to near multi-decade lows.ⁱ US headline PPI rose 7.4% in November YoY, above expectations of 7.2%, and consumers’ one-year inflation expectations fell to 4.6%, the lowest since September 2021.ⁱⁱ

While current data shows a relatively healthy economy, concerns about future growth are increasing. Yield curve inversion, which is a harbinger of slowing growth and recession, hit its widest level since 1981ⁱⁱⁱ. Additionally, positive jobs data has raised concerns that the Fed will tighten to a level that will potentially trigger a recession. We point out that markets have been repeatedly wrong throughout 2022 that the Fed would slow its pace of rate hikes.

Fed Chair Jerome Powell noted the Fed has made substantial progress toward more restrictive policy but is “committed to restoring price stability . . . to move inflation down to 2 per cent over time^iv.” Elevated wage growth, robust aggregate employment and healthy consumer spending raise concerns that the fight against inflation could drag on^v. Inflation does not always decrease in a linear fashion, and negative data could quickly change the narrative and cause rapid market repricing.

S&P 500 earnings are expected to decline for Q4/22, which would mark the first decline since Q3/20.^vi The number of companies citing the term “recession” on Q3 earnings calls remained elevated.^vii Nonetheless, current equity valuation remains in line with history: the price/earnings ratio of the S&P 500 is at the 10-year average of 17.1x and is cheaper than it was one year ago^viii.

Risks and opportunities abound as we prepare to enter 2023. Our portfolios have benefitted from strong risk management throughout 2022, and we believe continued discipline, patience and objectivity are critical in this environment.

Thank you for your confidence in our team.

Asset Management Department

Sequoia Financial Group