markets & economy  |  june 29, 2022

2022 Midyear Market Outlook: Transitioning to a New Paradigm

Adjusting to an uncertain future.


Key Insights

  • Russia's invasion of Ukraine, COVID-19 lockdowns in China, higher energy prices, and rising interest rates could make the second half difficult.

  • A spike in bond yields punished equity valuations in the first half. The question now is whether an earnings slowdown will be the next shoe to drop.

  • U.S. Treasuries and other core bonds didn’t offer much diversification in the first half as equity correlations jumped. New approaches may be needed.

  • War in Ukraine and sanctions against Russia could continue pushing commodity prices higher but also could accelerate a shift to renewable energy.

Arif Husain, CFA

Head of International Fixed Income and Chief Investment Officer

Justin Thomson

Head of International Equity and Chief Investment Officer

Sébastien Page, CFA

Head of Global Multi‑Asset and Chief Investment Officer

Introduction: Adjusting to an Uncertain Future

Heading into the second half of 2022, higher inflation and rising interest rates remain the most serious threats to global financial markets, T. Rowe Price senior investment leaders say.

Russia’s invasion of Ukraine has added fire to those risks by pushing food and energy prices sharply higher and further disrupting global supply chains.

This inflationary “shock on shock” has put more pressure on the U.S. Federal Reserve and other major central banks to tighten monetary policy, while making it more difficult for them to tame inflation without choking off economic growth, according to Sébastien Page, Head of Global Multi‑Asset and Chief Investment Officer (CIO).

“The three biggest challenges for investors over the next few months will be inflation, inflation, and inflation,” Page says. “It’s the transmission mechanism for all the other risks we are facing.”

The key question now is whether those risks will cause a sharp deceleration in growth or push major economies into full‑blown recessions, dragging corporate earnings down as well, Page warns.

Beyond the cyclical risks, investors need to consider that global markets may have reached a structural inflection point—an end to the era of ample liquidity, low inflation, and low interest rates that followed the 2008–2009 global financial crisis (Figure 1).

“I think that regime is over,” says Arif Husain, Head of International Fixed Income and CIO. “You can throw away that playbook.”

Central bank liquidity was critical for stabilizing economies and markets during both the financial crisis and the coronavirus pandemic, notes Justin Thomson, Head of International Equity and CIO. But it helped push valuations for many risk assets toward historical extremes. “I think we’ve learned from history that those extremes are never permanent,” he says.

However, the new paradigm also could offer potential opportunities for investors with the skills and research capabilities needed to seek them out, Thomson adds. “In volatile markets, active management can be your friend.”

The Era of Tame Inflation and Ample Liquidity Appears To Be Over

(Fig. 1) U.S. inflation* and the yield on the U.S. two‑year Treasury note

The Era of Tame Inflation and Ample Liquidity Appears To Be Over Line Graph

May 31, 2006, through May 31, 2022.
*Inflation = U.S. Consumer Price Index for All Urban Consumers.
YoY = Year‑over‑year.
Sources: U.S. Bureau of Labor Statistics and the Federal Reserve Bank of St. Louis.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of June 2022 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

Risks: International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets. Small‑cap stocks have generally been more volatile in price than the large‑cap stocks. The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. Sustainable investing may not succeed in generating a positive environmental and/or social impact. Fixed‑income securities are subject to credit risk, liquidity risk, call risk, and interest‑rate risk. As interest rates rise, bond prices generally fall. Investments in high‑yield bonds involve greater risk of price volatility, illiquidity, and default than higher‑rated debt securities. In periods of no or low inflation, other types of bonds, such as US Treasury Bonds, may perform better than Treasury Inflation Protected Securities. Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency. Diversification cannot assure a profit or protect against loss in a declining market. Derivatives may be riskier or more volatile than other types of investments because they are generally more sensitive to changes in market or economic conditions; risks include currency risk, leverage risk, liquidity risk, index risk, pricing risk, and counterparty risk.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. Actual future outcomes may differ materially from any estimates and forward-looking statements made. All charts and tables are shown for illustrative purposes only.



Next Steps