Consumers can breathe a sigh of relief: Inflation has peaked, said Kristina Hooper, chief global market strategist at Invesco, an investment management company with $1.3 trillion in assets under management.
But that also suggests the United States faces an economic slowdown or a mild recession next year, if not a severe recession, added Hooper, who spoke on a virtual panel Tuesday called “Investing in Inflationary Times,” sponsored by Financial Advisor magazine and MoneyShow.
The panel, moderated by Sam Stovall, chief investment strategist of CFRA Research, discussed the ways advisors could help clients deal with a down market and take advantage of the opportunities created by volatility. That includes an increasing risk of a recession, a shifting worldwide political landscape and tighter monetary policies.
“The U.S. will have an economic slowdown or a mild and relatively brief recession and will begin to recover by the end of 2023,” Hooper said. She based that prediction on her belief that by early next year the Federal Reserve Board will pause the interest rate hikes it has pursued to put the brakes on inflation.
Another panelist, Joseph Kalish, chief global macro strategist at Ned Davis Research, also thought there are good indications for the economy on the horizon.
“The Fed is moving away from such intense focus on inflation,” Kalish said. “There are a lot of good things that are starting to appear.” He said inflation is going to come down and consumers will feel more comfortable buying even big purchase items, although the higher cost of services is going to remain more stubborn. Inflation for services could be down to 4% by the middle of next year, he said.
In this scenario, value stocks and small-cap equities will have an advantage even before the Fed acts in the first quarter of 2023, Hooper said. In addition, wage growth will ease early next year amid layoffs and reductions in job openings. The jobs part might seem like bad news, but it’s necessary if the United States wants to avoid recession.
Advisors need to look at these macro trends and translate them into investable ideas. They can also stay put, which is an action in itself, said Michael J. Cuggino, president and portfolio manager at the Permanent Portfolio Family of Funds. “The events surrounding Covid that unfolded in 2020 were so dramatic that no one is going to be able to just snap their fingers and go back to normal.” The effects of business closures and the other aftershocks of Covid are still being felt.
“We are a conservative shop, and events are unpredictable now,” Cuggino said. “The question is: How quickly will inflation recede and where will it settle? There will be a slowdown, but many factors will determine whether it will be mild or deep.”
It’s not certain how much economic disruption the protests in China will cause. “If it is severe, it makes a potential recession in the United States more likely,” Cuggino said. “In addition, we do not have anything near a full assessment of the long-term impact of conflict in Ukraine.”