Macroeconomic & Geopolitical

The Bull Case for Next Year: It Won’t be Worse Than This Year

September 2022 – 3 min read

It’s not a pretty outlook, but it’s important to keep thinking at least one or two moves ahead.

These days it’s all too easy for investment conversations to turn dark amid the worrying economic data and fiery political rhetoric. But while it’s clear that inflation is a problem and the world economy is slowing, the savvy investor also knows that even a slight improvement in either one can give markets a sudden boost.

The only question is when.

To be clear, we are not calling the bottom here. The Fed looks determined to keep rates rising until it does some damage to robust U.S. consumption trends. Europe faces winter with a breathtaking spike in energy prices and a central bank that acts more hawkish than ever. Meanwhile, China’s headwinds from COVID lockdowns, energy shortages, and real estate turmoil show few signs of dissipating. It has been a while since a global slowdown was so synchronized.

Through all this gloom, the S&P 500 did manage a 17% summer rally as the U.S. consumer price index seemed to peak, but the euphoria didn’t last. It's tempting to hope that slowing inflation allows the Fed to stop hiking next spring as gasoline, copper, and steel prices drop.

But America is still running hot. Household savings are still high and consumer credit is growing. The jobs market is tight and wages are rising. Even if inflation has peaked—and we’ll get an important update Tuesday this week—the path lower will have to be clear and persistent before there’s any chance of the Fed pausing, let alone easing, next year.

And if there’s one thing we have learned about data over the last few years, it’s that it is neither clear nor persistent for very long. This seems like a time to keep cash levels high, favor quality over value, and fill a portfolio with companies that will pay a reliable coupon or dividend.

Still, there will come a time when the data stops getting worse. Investment funds are hording larger-than-normal cash levels. Surveys suggest maximum bearishness. A little bit of good news could go a very long way in reversing the trend.

Even if the Fed still struggles to reach its 2% inflation target, a narrower range of, say, 3–5% would make it much easier for investors to make more predictable forecasts. Unemployment that inches higher from the current 3.6% will be greeted as good news that wage pressures will soon abate.

Elsewhere, we may not even need actual good news for markets to recover. The absence of bad news may be enough. Indeed, next year is unlikely to deliver an economic and political shock comparable to Russia’s invasion of Ukraine. European energy prices will be high, but it’s hard to imagine a jump that rivals this year’s.

China’s picture looks difficult but may not deteriorate more. The property market should stabilize further, even if it doesn’t return as a major driver of growth. While Chinese cities may face more COVID-related restrictions, global supply chains elsewhere should still ease.

What could sustain a rally next year when sentiment turns less sour?

If ever there were a U.S. economy that could withstand a Fed tightening cycle, it’s this one. The higher household savings and stronger corporate balance sheets mean U.S. demand may not suffer as much, even if rates rise. Unlike the aftermath of the Global Financial Crisis, U.S. banks are healthy and stand ready to lend when borrowers reappear.

Meanwhile, U.S. price expectations have remained mostly anchored in both surveys and financial markets. There is still abundant confidence that the Fed will bring inflation back down, which means it may not need to overtighten, as in previous cycles. If recession does come, it need not last long.

Of course, this may all be a mirage. If some investors can see this slightly less-dire picture through the current gloom, there are others who believe a world that looks like it has hit bottom can always find a way to dig deeper.

But just as the challenge of chess is to look ahead more than one or two moves to narrow the range of likely outcomes, the challenge of investing is to see through today’s economic numbers to envision what might come next. The important reminder here is that while we will never recognize the bottom when it comes, we have to keep watch.


Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.