[June 28, 2022]

Russell Investments' Global Market Outlook: Strategists See 'Fear of the Known' Driving Market Outlook at Mid-Year

As recession fears and central-bank tightening drive market volatility at mid-year 2022, Russell Investments' strategists believe U.S. core inflation has likely peaked and markets should stabilize and possibly recover over the second half of the year.

"It was unclear early in 2022 how far inflation would surge, how aggressively central banks would respond and whether Russia would launch a full-scale invasion of Ukraine. Core inflation looks to be peaking in the U.S. at mid-year and markets are pricing relatively aggressive tightening paths for most central banks," said Andrew Pease, global head of investment strategy at Russell Investments. "These issues are at least now well understood by markets."

Russell Investments' composite sentiment index, which measures investor sentiment for the S&P 500® Index (via a range of technical, positioning and survey indicators) at mid-year reads as deeply oversold. This provides the strategists with some reassurance that markets have accounted for the bad news so far and could recover if inflation and growth turn out better than markets currently fear.

"It's possible that investors will panic and reach a sell-everything capitulation point, but the lesson from previous market corrections is that periods of panic can provide the best opportunities for longer-term investors," Pease said.

Pease sees the U.S. economy as the main uncertainty for the global outlook. He believes the pace and magnitude of U.S. Federal Reserve (Fed) tightening creates the risk of a recession by the second half of 2023. While a deep recession could trigger a larger equity bear market, he expects either a slowdown or mild recession as the two most likely outcomes. The upside risk for the U.S. economy and markets comes from the possibility that U.S. core inflation has peaked. This, combined with some softening in the labor market, could allow the Fed to become less hawkish in the second half of the year.

Regarding the outlook for Europe, the most significant risk hinges on Russia's response to the European Union's embargo of its oil exports by cutting off gas supplies to the region. "Europe's heavy dependence on Russian gas means that retaliation and a large rise in gas prices would almost certainly send the region into a recession," Pease said.

Russell Investments' cycle, value and sentiment investment decision-making process at mid-year 2022 cautions against becoming too pessimistic. Sentiment scores as extremely oversold and at levels last reached during the COVID-19 market panic of March 2020. The firm's valuation methodology scores U.S. Treasuries as cheap,while equity valuations are harder to benchmark due to current uncertainties around mean reversion for price-to-earnings (PE) multiples and profit margins.

The firm's strategists summarize their mid-year asset-class preferences as follows:

• Non-U.S. developed equities are preferred to U.S. equities because they are relatively cheaper and likely to benefit from U.S. dollar weakness should the Fed become less hawkish.

• Emerging market equities could recover if there is significant China stimulus, the Fed slows the pace of tightening, energy prices subside, and the U.S. dollar weakens. For now, a neutral stance is warranted.

• High yield and investment grade credit are starting to show better value with spreads above their long-term averages. Spreads will remain under upward pressure if U.S. recession probabilities increase, and the Russia/Ukraine conflict escalates. High yield and investment grade should perform well if the Fed becomes less hawkish and an economic soft landing becomes likely. "We have a neutral outlook on credit markets for now but can see the case for becoming more positive if a U.S recession becomes less likely," Pease said.

• Government bond valuations have improved after the rise in yields. In the team's view, U.S. bonds now offer good value, although Japanese, German and U.K. bonds are still moderately expensive. "A positive for government bonds is that markets have fully priced hawkish outlooks for most central banks, and this should limit the extent of any further sell-off," Pease said.

• Real assets: Global Listed Infrastructure (GLI) has been one of the better-performing asset classes so far this year, having benefited from energy exposure, while Real Estate Investment Trusts have lost more than 20%. Both should benefit if Russia/Ukraine hostilities subside and inflation concerns continue, although GLI should give back some of the gains from energy infrastructure. Commodities have been the best-performing asset class and the only one to post a positive return. Energy and agricultural prices have surged on the Russia/Ukraine conflict. The team expects some of these gains will be reversed if hostilities subside. One risk for commodity markets is that China's economy continues to slow. On balance, the team believes the case for commodities exposure is still positive, but weaker growth as central banks tighten policy will dampen demand.

• The U.S. dollar has made gains this year on Fed hawkishness and safe-haven appeal during the Russia/Ukraine conflict. The team believes it should weaken if hostilities subside and if lower inflation outcomes later in the year lead to less Fed tightening than markets currently expect. The main beneficiaries are likely to be the euro, which has become more undervalued, and the Japanese yen, which has weakened on commodity price inflation and China growth concerns.

For more information, please see the team's 2022 Global Market Outlook - Q3 update

About Russell Investments

Russell Investments is a leading global investment solutions firm providing a wide range of investment capabilities to institutional investors, financial intermediaries, and individual investors around the world. Building on an 86-year legacy of continuous innovation to deliver exceptional value to clients, Russell Investments works every day to improve the financial security of its clients. The firm has $326.3 billion in assets under management (as of 3/31/2021) for clients in 32 countries. Headquartered in Seattle, Washington, Russell Investments has offices in 19 cities around the world, including in New York, London, Toronto, Tokyo, and Shanghai.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

View source version on businesswire.com: https://www.businesswire.com/news/home/20220628005471/en/

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