A better year for investors may lie ahead, but volatility may remain high in early 2023 as a potential global recession lingers, central banks step down rate hikes and China's reopening introduces upside risk to inflation. We believe that investors can continue to focus on stocks with "quality" characteristics that outperformed in the up-and-down markets of 2022 and contributed to international stock market outperformance last year.
Markets seem to have been taking their direction from central banks during 2022 and we anticipate that probably will continue in the quarters to come. While a pivot to rate cuts does not seem likely in the near term, central banks seem to be signaling a step-down in the size of the rate hikes, and in some cases, even a pause. The stock market has offered Thanksgiving in return with an early "Santa Pause" rally; the MSCI World Index of global stocks is up over 15% since the end of September, the strongest gain for a quarter since the pandemic rebound in the second quarter of 2020.
- The U.S. Federal Reserve has signaled a slowdown in the pace of rate hikes from 75 basis points (bps) in November to 50 bps in December.
- The Bank of Canada stepped down from 75 bps to 50 bps in late October.
- The central banks of Australia and Norway stepped down from 50 bps to 25 bps at their meetings in October/November.
- The central bank of one of the largest emerging market economies, Brazil, and the central bank for the largest emerging market economy in Europe, Poland, both paused, leaving rates unchanged.
All of these central banks meet again to set rates during the next two weeks.
The chart below shows the pace of rate hikes for major central banks—notice that the bars are getting smaller as rate hikes moderate. The shaded column for December reflects current market-based forecasts for the upcoming rate-setting meetings and blank columns reflect months without scheduled central bank rate-setting meetings (see Central Banks Stepping Down for more on our thoughts on the end of rate hikes).