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Investment Outlook

The economy and markets: key points to know

Brian Nick
Chief Investment Strategist
Raden Inten II Airport Bandar Lampung, Indonesia

Key points to note

Expect normalization, not severe recession

Investors may be tempted to stock up on cushions as the debate heats up over whether the global economy will experience a hard or soft landing. But the data so far barely show a loss in altitude, let alone a sharp descent. Economic patterns have been abnormal for the past two years, but are slowly reverting to pre-pandemic form. Different countries and sectors are normalizing at different rates, creating market turbulence and exposing economic forecasts to ridicule. We expect a significant moderation in inflation over the next 18 months, as financial conditions tighten and economic growth slows in the world’s largest economies. But a mild recession is certainly not out of the question.

Job security is the new consumer confidence

Consumer spending is keeping the developed world growing, with many countries still benefiting from pandemic-era pent-up demand and excess savings. Jobs have returned quickly and wages are rising about as fast as prices. Yet consumers have almost never reported feeling so down in the dumps. Sentiment surveys are registering lower readings today than even in the midst of the 2008 financial crisis. But while consumers aren’t talking the talk, they are walking the walk: growing their spending well in excess of inflation (Figure 2). Rising net worth and job security are far more important predictors of consumer behavior than comments people are willing to share with survey takers.

Figure 2: Spending levels remain high despite sour sentiment
Inflation is likely to moderate over the next 18 months.

The food and energy “tax” is worse for lower-income consumers

Geopolitical strife has contributed to persistent increases in energy and food costs. This affects every consumer at some level, but higher-income households and wealthier countries are relatively insulated from the direst consequences. Some emerging markets may soon be susceptible to acute food shortages and even social unrest unless supplies replenish and price increases relent. But even countries like the U.S. will have a narrower base of consumption growth this year as fewer households meaningfully increase their real spending.

It’s still all about central banks

Every economic data point is being refracted through the prism of how central banks will respond. This puts the labor market – a leading inflation indicator because wages play a big role in determining prices – at the center of our attention for the balance of 2022. News of job or pay freezes sounds bad, but they are necessary to slow the rapid pace of aggregate demand growth, rebalance the economy and allow policymakers to take their feet off the brakes. While a lot more central bank rate hikes lie ahead, a modest softening in employment data can help ensure they don’t smother the young expansion.

All market and economic data from Bloomberg, FactSet and Morningstar.

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.

Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.

Important information on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Socially Responsible Investments are subject to Social Criteria Risk, namely the risk that because social criteria exclude securities of certain issuers for non-financial reasons, investors may forgo some market opportunities available to those that don’t use these criteria. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy.

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