EQUITIES FACE DOWN RECESSION WORRIES

Higher interest rates made 2022 a tough year for the equity market, with the prolonged war in Ukraine and increasing probability of economic slowdown in 2023 further weighing on investor sentiment.

The MSCI All Country World Index, a measure of the global stock market, returned -18.0% during the year, while the S&P 500 returned

-18.1%. International developed stocks outperformed their U.S. counterparts, while emerging market stocks underperformed developed markets.

The most significant risk for equities today is not high inflation but that Fed policymakers overshoot in their inflation fight, thereby inducing an economic slowdown beyond what the market currently expects. This is an important possibility, but we take the view that the approaching slowdown will be mild. Even as certain macroeconomic data have softened in recent months, both labor demand and consumer balance sheet strength remain in a relatively robust position today. In any case, we will be closely scrutinizing this important issue and the dynamics that underpin it.

We expect volatility to remain heightened in the first quarter of 2023. Looking beyond short-term uncertainty, today’s higher interest rates mean that ex-