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The Folly of Forecasting
“It’s tough to make predictions, especially about the future”
Given it’s that time of year when Wall Street’s market strategists trot out their year ahead outlooks, we thought we might share our thoughts on the value of forecasting or perhaps the lack thereof. If the following sampling of prior year outlooks for CY2022 are any gauge, we doubt next year’s predictions are worth the paper they’re printed on.
Inflation Communication Breakdown
The decision-making process and subsequent market reaction to central bank actions largely dictated financial headlines over the past few weeks. As a recap, the European Central Bank, the US Federal Reserve and the Bank of England all implemented 75 basis point rate hikes. These increases came in an effort to stave off persistently high inflation prints in their regions, including 9.9%, 8.2% and 10.1% annualized rates of inflation in September, respectively.
Lula—Take 2: Lula Victorious in Brazilian Presidential Election
Following a tightly contested race, Brazil’s presidential election on Sunday, October 30 resulted in victory for former President (2003-2011) Luiz Inácio Lula da Silva (or “Lula”) of the Workers’ Party and subsequent defeat for right-wing incumbent, Jair Bolsonaro. Lula amassed more than 60 million votes for the most in the country’s history to defeat Bolsonaro by less than 2% in Brazil’s tightest finish on record.
Trick or Treat: Policymaking Edition
In mid-October, EMsights team members traveled to Washington D.C. to attend meetings around the International Monetary Fund (IMF) and the World Bank Group annual meetings. Given that uncertainty permeates the macro backdrop, it came as no surprise that the meetings held a somber tone. Given Russia’s invasion of Ukraine, Fed tightening and the global inflationary environment in general, uncertainty and bearishness abound. Ultimately, the IMF opted to lower its global economic growth outlook for 2023 to 2.7%, down 0.2 percentage points from its most recent outlook in July, and lower than its projection for 3.2% growth in 2022.
A Market Head Fake While the Foundation Continues to Crack
The convergence of rising interest rates, high inflation and slowing growth have roiled global financial markets, including emerging markets (EM) debt. The Federal Reserve’s rate hikes are taking place against the backdrop of tightening by many central banks in developed and emerging markets. We believe these factors are fueling risk-off sentiment for EM fixed income assets.
Inflation, Inflation Everywhere?
All eyes have been focused on inflation over the course of 2022. Ours too! Most of the attention has been given to the developed world and for good reason—inflation is the highest it’s been in over 40 years for many countries. Consumer prices remain volatile and elevated across much of the world, denting investor optimism for easing inflation and less aggressive interest rate hikes. One country’s recent inflation print really caught our attention. One hint: They do not have an Inflation Reduction Act.
Intelligent Investing: Looking beyond Interest Rates
Low interest rates have been a defining feature of the investing landscape in recent years. The rate on the benchmark US 10-year Treasury Note has been in a 40-year downtrend (Exhibit 1), leading to sub-3.0% yields for the better part of the past decade.
Summer Dreams, Ripped at the Seams
For those in the northern hemisphere, it’s been a volatile summer for emerging market bonds. The asset class has swung between gains and losses amid concerns about rising interest rates, high inflation, slowing growth and the Russia-Ukraine conflict. Then in late-August, Federal Reserve Chairman Jerome Powell’s speech on sustained higher interest rates rattled global markets, halting a rally in risk assets.
If you’re of a certain age you’ll probably recall those Got Milk? commercials that were omnipresent in the mid-1990s. It was one of the all-time greatest ad campaigns, becoming a cultural touchstone. Seeing as milk consumption per capita in the US has been decreasing for at least 20 years, the milk producing industry might want to consider dusting off its old playbook. Though not entirely clear why Americans are drinking less milk, the decline is at least partially explained by an aging population.
Demographics might be hurting milk consumption, but aging populations in the US and other major economies are a distinct tailwind for income-producing securities, including dividend-paying stocks.
The Fed Cures Bird Flu
**FED HIKES 75BPS, INITIATES QT, TARGETS FOOD INFLATION. FED CURES BIRD FLU, LIFTS FOOD EXPORT RESTRICTIONS IN FOREIGN COUNTRIES, SHIFTS WATER TABLE FROM FLOODED FARM AREAS TO DROUGHT AREAS, RELEASES WHEAT FROM STRATEGIC GRAIN RESERVE, INCREASES BABY FORMULA PRODUCTION.