Inflation and the actions taken by central banks will be the two most important signals to focus on, writes Principal Asset Management in its outlook for 2023 report.
Arguably, the current economic environment and capital markets are almost entirely the work of central banks “pumping the brakes” to slow growth and cool inflation. The clear signal they are sending is that they want to firmly re-anchor inflationary expectations. In the 1980s, Federal Reserve (the Fed) chair Paul Volcker pushed the Fed Funds rate to historically high levels in a very short period, creating a severe recession that ultimately quashed inflation. History shows that few central bank tightening cycles have ended well for the economy.
Investors will do well to heed this signal. But periods of turmoil also afford unique opportunities that investors should be prepared for