Reflecting on 2022

Investor resolve was tested in 2022 with a return to a bear market. Seismic shifts in the macroeconomic backdrop, from elevated inflation readings across the globe to continued global supply chain disruption, ongoing commodity price pressures and aggressive central bank monetary policy actions, to name a few, created a perfect storm that led markets lower.

As the path of inflation and Federal Reserve (Fed) policy remain key drivers heading into 2023, from PNC’s perspective, it is increasingly evident that many parts of the globe, including the United States, may find themselves in a recession at some point in the year ahead.

What you should know (2023): 

Monetary Policy - The market expects a slowdown in the Fed’s tightening campaign in 2023. The path forward depends on inflation and the Fed fund’s terminal rate. Restrictive policy is driving slowing growth, leading us closer to economic contraction. 

Inflation - The Fed’s rate-hike campaign is cooling demand, and inflation is beginning to decline. Higher interest rates and high levels of inflation are pressuring corporate profit margins and consumer balance sheets as we head toward a slowdown. 

U.S. Equity - The initial path for equities will depend on achieving a line of sight to the Fed’s terminal rate. Inflation is not only limiting valuation multiples, but it is also pressuring profit margins amid slowing economic growth.

Developed International Equity - While valuations appear favorable, we believe earnings estimates have yet to reflect significant, structural headwinds. Major central banks are pressing ahead with monetary policy tightening despite deteriorating economic conditions.

Emerging Markets Equity - Emerging markets equity is currently among the most attractive asset classes, in our view, based on valuations and growth expectations. Headwinds from U.S. dollar strength should subside somewhat, and China may be nearing an inflection toward economic recovery. Defined contribution plans should consider evaluating their exposure to emerging markets equities, a highly volatile asset class, via any international equity funds in the lineup prior to adding a standalone emerging markets equity fund. 

Fixed Income - We expect the relative strength of the U.S. economy to help Treasuries remain a global safe haven. Given the move in interest rates, attractive yields make bonds relevant once again. A slowdown in Fed rate hikes should lead to lower interest rate volatility in 2023.