Morgan Stanley IM: 2023 - A Year of Long and Variable Lags

• It is timely to connect the November Fed meeting with an outlook for 2023, as that meeting may mark the end of aggressive 75 basis point (bps) hikes, where the pace may slow to 50 bps in December and 25 bps thereafter.
• A terminal Fed funds rate of 4.75 - 5.25% may be reached in 1Q 2023, dependent on inflation data. Nevertheless, the end is near.
• This is important because interest rates hikes have been the key driver of asset prices in 2022, and changes in policy likely will have a strong influence on asset prices in 2023.
• But it is important to understand that rate hikes will influence the path of earnings, default risks and credit spreads, and ultimately the type of recession we get, whether deep (earnings) or wide (spreads).
• Why? Because as the Fed has said, rate hikes work with "long and variable lags" making 2023 “The Year of Long and Variable Lags.”

View Transcript

See below for important disclosures.

^{Risk Considerations}

^{Diversification does not eliminate risk of loss. There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this portfolio may be subject to certain additional risks. Fixed income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Mortgage- and asset-backed securities are sensitive to early prepayment risk and a higher risk of default, and may be hard to value and difficult to sell (liquidity risk). They are also subject to credit, market and interest rate risks. Certain U.S. government securities purchased by the Strategy, such as those issued by Fannie Mae and Freddie Mac, are not backed by the full faith and credit of the U.S. It is possible that these issuers will not have the funds to meet their payment obligations in the future. High-yield securities (“junk bonds”) are lower-rated securities that may have a higher degree of credit and liquidity risk. Public bank loans are subject to liquidity risk and the credit risks of lower-rated securities. Foreign securities are subject to currency, political, economic and market risks. The risks of investing emerging market countries are greater than risks associated with investments in foreign developed countries. Sovereign debt securities are subject to default risk. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk).}

^{IMPORTANT DISCLOSURES:}

^{Past performance is no guarantee of future results. The returns referred to in the audio are those of representative indices and are not meant to depict the performance of a specific investment.}

^{There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market.}