Although the overall economy continued to slowdown, and inflation remains elevated, the global investment market continued the strong rally on the back of optimism over monetary policy tightening. Over the month of November, the Dow, S&P 500, and the NASDAQ gained 5.67%, 5.38%, and 4.37% respectively.

Investment sentiment was buoyed by dovish expectations, although fundamentals have not shown much improvement over the previous month. In our view, while a slowdown in the pace of rate hikes is likely, it shouldn’t mark a pivot in the monetary policy. We still consider inflation elevated, even Fed’s preferred measure of core PCE is far higher than the target level, there is insufficient grounds for a near term pivot until the figures are low enough. With interest rates remaining at high levels, expect continued pressure on both the economy and the stock market.

Given the weak economy and high inflation, ‘soft landing’ is not our base case for 2023. Recession is possible, expect corporate earnings to take a further hit, driving equity markets lower. Even if the economy does manage to achieve a ‘soft landing’, current valuations are relatively unattractive considering the conservative estimated terminal risk free rate of 5% in 2023, the ongoing quantitative tightening progress will also put a cap on valuation in the equity market. Therefore, despite the recent rebound in the market based on optimism, we do not think it is sustainable, and would remain conservative on US equities before market reflects the downside risks appropriately.