'We are in a bunch of holding patterns', says chief strategist

Financial industry is waiting for clarity on an unprecedented eight fronts as we near year-end

'We are in a bunch of holding patterns', says chief strategist

As we move through the fourth quarter, many of the challenges that have emerged in 2022 are still unresolved. Kristina Hooper, Invesco’s chief global market strategist, said: "It feels like we are in a holding pattern. In fact, we are in a bunch of holding patterns.”

We’re waiting for better inflation data to see when the central banks finally pivot and the global economy is slowing after a dramatic hike in rates, but Hooper noted that she's waiting to see the data show a "meaningful decline" in inflation.

Read More: 'Change is difficult, especially with Fed policy confusion' | Wealth Professional

We’re also waiting for the western developed countries’ labour markets to loosen. Hooper said that, in September, the U.S. jobs report was slightly better than expected with the unemployment rate dropping. But, the labour force participation had also declined, so she said the progress doesn’t seem to be enough for the U.S. Federal Reserve.

She noted that it’s worse in the UK and eurozone, where unemployment remains very low. The U.K.’s labour force participation “seems stuck in a rut like the U.S.” and both have similar wage and inflation problems. The eurozone’s labour force participation has been rising, and it has a much smaller wage inflation wage, but both the U.S. and eurozone have a serious energy inflation problem. 

We’re waiting to see if there will be a global recession, though more signs now are pointing to it. Even the International Monetary Fund’s Managing Director, Kristalina Georgieva, warned last week that the risks of recession are rising and tightening monetary policy too much too fast across the globe could push many economies into a prolonged recession. The World Trade Organization issued a similar warning last week. Hooper said, “there is always the chance that if central banks pivot quickly enough, such a fate can be averted”.

Hooper noted that we’re also waiting to see if something breaks globally as the central banks keep tightening monetary policy. The U.K.’s government tax-cut plan recently sparked a major sell-off in UK government debt and a sharp rise in yields. The Bank of England stopped in with an emergency purchase program for long-dated UK government bonds plus some other measures.

The financial industry is also waiting for earnings season “to see how much damage has been done to companies’ revenues and earnings as a result of global monetary policy tightening,” said Hooper. So, the industry is waiting for the results of the third quarter as well as guidance for the fourth.

We’re also waiting to see how Russia’s war on Ukraine will unfold and how bad the winter will be in Europe, and whether it will be able to weather it without any major energy-related shutdowns.

Finally, we’re also waiting to see what happens at – and after – the China Party Congress, which  starts Oct. 16. She said the current president, Xi Jinping,  is “expected to be elected for a norm-shattering third term and to deliver an all-important policy blueprint for the next five years.  We don’t expect any policy surprises.”

What does all this mean for advisors and their clients?

Read More: Why advisors should be more optimistic in these tough times | Wealth Professional

Hooper is recommending they keep waiting – and not overreacting. “I believe it’s important to stick to the long-term plan,” she said.  But, she added that they should also consider dividend-paying stocks, which have been underrepresented.

“One gets paid to wait through dividend payment. Those payments can be an important component of one portfolio when we’re all stuck in a holding pattern. And, for those who are overexposed to cash,” she said, “investors should be getting ready to reposition for a recovery.”