Light on the Horizon

Optimism and pessimism operate on a continuum, of which realism is the center point. Pessimism has taken the reins of financial markets, limiting enthusiasm for the future, and dragging down valuations. The depth of despair lays the foundation of optimism, yet the cloud of pessimism makes it hard to see positive signs. So, this week’s insights are focused on pointing out some points of light on the horizon.

1. Longer-term US inflation expectations have moderated
   Review of longer-term inflation expectations (referred to as Breakeven) are projecting long-term (next 5 and 10 years) inflation to approximate 2.5%¹. This suggests financial markets have confidence that the current bout of inflation is of limited duration, likely due to the items below.
2. Global supply chain pressures are easing
   The Global Supply Chain Pressure Index², measured by the New York Federal Reserve, has eased recently. Easing supply chains point to easing inflationary pressures.
3. Commodity prices are on the decline
   Prices for materials, used in manufacturing as well as consumption, are also easing. The Goldman Sachs Commodity Index³and the Bloomberg Commodity Index³ have fallen from their peaks set in the recent months. Falling raw goods prices give further fodder to lower future inflation.
4. Positive economic signs have emerged in China
   Although China’s second-quarter economic growth was disappointing, June presented positive signs as lockdowns eased³. Given China’s stance as a worldwide manufacturer, reopening factories are a good sign for global growth as well as increased goods availability tamping down inflation pressures. Additionally, Chinese cities have reopened, and economic activity is improving. China has moved from their draconian widespread lockdowns to very localized containment as small as neighborhoods or even apartment buildings.
5. The Russian Conflict seems contained
   The initial worry of an expanded conflict seems to have dissipated. The conflict seems to have languished into a tit-for-tat between Russia and Ukraine with broader European engagement unlikely.
6. Consumers are still spending
   Even amongst the focus on the negative, people are still enjoying their summer, purchasing products and visiting with friends and family.

Stocks have been beaten down, but that does not mean equity downside has been extinguished, especially since earnings expectations are likely to be adjusted downward. But so much pessimism built into the markets can often be the foundation to build upon. When pessimism permeates markets, positive surprises can act like a springboard. Please remember we are here to help you through difficult times.

¹St. Louis Federal Reserve FRED database;
²https://www.newyorkfed.org/research/policy/gscpi#/interactive
³Morningstar;
⁴https://www.cnbc.com/2022/07/15/china-q2-gdp.html

The opinions expressed are those of Heritage Financial and not necessarily those of Lincoln Financial Advisors Corp.
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