Given this market environment, here are our views on economic and market prospects:
Rates. We expect the Federal Reserve (Fed) to pause early next year and cut rates later in 2023. The Treasury yield curve should remain inverted, as short-term rates remain anchored by Fed rates and longer-term rates stabilize and then decline, reflecting slower economic growth.
Equities. We expect that the uncertainty over the path of inflation and interest rates will diminish toward the end for 2022 and into the first part of 2023. That should set the stage for markets to recover. Equity markets historically have not sustainably rallied from bear market lows until the Fed has stopped raising rates and begun cutting rates.
Credit. Credit sectors offer attractive yields not seen in years. Credit spreads, an indicator of risks such as default, have widened but remain below recessionary levels. We expect spreads to widen into next year as the economy slows before stabilizing and rallying. We are closely watching credit spreads as they often foreshadow equity moves.