Given this market environment, here are our views on economic and market prospects:
Volatility. We expect volatility to remain high until there is greater clarity on inflation and the economy.
Inflation. There are tentative signs that inflation may be peaking. We expect inflation to peak in the second half of this year. A wild card is commodity prices, which are somewhat hostage to geopolitical risks.
Recession. Estimated probabilities of a recession are increasing but vary, with most estimates in a range of about a 30% to 60% probability, which appears reasonable. If the economy does tip into a recession, it’s likely to be moderate given the underlying strength of both consumers and companies.
Equity markets. Valuations and market prices have reached levels that are more attractive to long-term investors. Historically, once the market hits bear market levels (down 20%) average performance of the next 12 months has been 16%, with a 17% chance of a loss.
Interest rates. Interest rates have fallen from peak levels as markets have started pricing in Fed rate cuts next year in response to recession risks. In the near-term, we expect interest rates to trade within a range below peak levels seen in June.
Yields. Yields in the corporate and municipal bond market look significantly more attractive, particularly if inflation continues to soften over time and rates fall.
Real estate. With mortgages rates up, the housing market should continue to cool off. Longer-term, strong demand and a shortage of housing should support the market.