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The Federation of European Independent Financial Advisers
The words ‘don’t panic Mr Mannering’ spring to mind as I watch UK inflation seemingly reach an all time high. This year we’ve felt the impact of energy price increases and higher bills at the supermarket with less in our trollies, but what’s really going on behind the scenes, and what can we expect as we approach the end of 2022 and the start of 2023, not just for shopping trips but with our finances generally …

The chart shows the annual inflation rate in the US for 2022, and as you can see, it has now fallen for four months in a row. Inflation looks like it peaked in the US at 9.1% and it is now moving back down, sitting at 7.7% as of October. Many of the drivers of higher inflation are now reversing: energy, petrol, electricity, food, and used car prices are all falling in the US. When these figures were announced, we saw stocks soar on the back of a better-than-expected inflation report. So, why the big reaction? Falling inflation is likely to lead to less pressure on central banks to raise interest rates, and, as we all know, rising interest rates reduce companies’ profits, as they must pay more to borrow. Markets are now expecting fewer interest rate rises and less pressure on company profits, so stocks rose to reflect this.


The US tends to book the trend in terms of what happens next in Europe. So let’s have a look at the UK, which in October actually hit 11.1% inflation, the highest since 1981:


The Bank of England are projecting that the UK is also peaking and is expecting inflation to start falling. This would make sense after seeing inflation drop in the US for four months in a row.


Let’s take a closer look at what has contributed to the increases this year …


It’s interesting to see where the biggest rises are, but I also think it’s important to put this year’s inflation rises into perspective. The chart below tracks UK inflation from 1960 to date. Thankfully we’re nowhere near the highs of the 1970s …


Looking towards 2023 …


It’s official, 2022 has been the worst year for the S&P 500 in more than a decade. But if you take a long-term view, years like this are not normal or typical … they actually bring excellent long-term buying opportunities. If the Fed manages to get inflation under control and navigate a soft landing for the US economy, analysts say 2023 could be a much better year. The recent fall to 7.7% is suggesting the Fed’s war on inflation is starting to produce victories, but we do still have a long way to go to reach the Fed’s 2% long-term target.


Heading into 2023, investors are already anticipating lower inflation and expecting a Fed pivot. A pivot with a pause in interest rate increases should help earnings to rebound. But the good news for investors is that the stock market is forward-looking, it prices in economic rebounds and earnings growth far in advance. The Fed slowing and eventually ending rate hikes will be bullish for investors in 2023 and should help the stock market.


My view?


Three things have killed the stock market in 2022: high inflation, which has led to big rate hikes, which has slowed the economy. I believe between inflation, rising interest rates and the threat of recession it’s a scary world for investors right now, and the effect that has on market sentiment will not help stock markets in the first half of 2023. Experts agree that there’s more volatility ahead.

However, those same three things are likely to reverse course in 2023, and as they do, stock markets will reverse course too, and go from crashing to soaring. With a well diversified portfolio, including investment in sectors that have greater earnings power such as energy, technology and healthcare, I can see a light at the end of the tunnel in the second half of 2023. With a potential Fed pivot and an averted economic downturn, stocks should rebound vigorously. Stock markets are set to soar next year in the same way they have after previous bear market crashes, such as 2021 (+27%), 2019 (+29%), 2009 (+24%), and 2003 (+26%).

The key is to make sure your portfolio is well positioned to take advantage of the current discounts and growth when it comes. Now is the time to buy equities, ahead of that reversal. I’m not saying we’ve hit THE stock market bottom. But I am saying that given the current macroeconomic trends, buyers of equities today are giving themselves the potential to be handsomely rewarded in 12 months.

This article was kindly provided by Andrea Speed from Speed Financial Solutions and originally posted at:

The above contents and comments are entirely the views and words of the author. FEIFA is not responsible for any action taken, or inaction, by anyone or any entity, because of reading this article. It is for guidance only and relevant professional advice should always be taken before investing in any assets or undertaking any financial planning.