No Match Found
As 2023 opens, volatility and uncertainty have increased in US capital markets — leading to deal flow slowing, valuations falling and investors seeking refuge in less risky assets. The economy will likely slow in the coming quarters, and stock prices may fall further in the short term. But we believe the markets are establishing a solid, fundamentals-driven platform for future growth.
The transition to a new environment has already begun. After a period of sustained economic growth — coupled with low interest rates and government stimulus — inflation surged to 9%. The Federal Reserve (Fed) responded in 2022 by aggressively raising rates by 425 basis points to wrangle inflation down to around 2%.
Stock market returns generally have a negative correlation with inflation — with obvious exceptions like commodities — because higher costs can’t always be passed on to customers. Inflation is just one of many contributors to the S&P’s loss of 19% in 2022 though. Some of the major drivers of capital markets volatility include the likelihood of a recession over a soft landing, geopolitical instability, human capital issues and emerging ESG considerations.
Still, we see some encouraging trends:
Third-quarter real GDP grew at a 2.6% seasonally adjusted annual rate, supported by consumer spending, government spending and a narrowing trade deficit. US growth is expected to remain positive in Q4. Consumer spending has slowed but remains in good shape — fueled by a tight labor market and strong household balance sheets even after accounting for recent asset price declines. The US economy still might lapse into a mild recession next year due to factors including high inflation, aggressive Fed tightening, a strengthened dollar hurting exports and slowing global demand. Our baseline scenario includes a mild 0.2% drop in real GDP growth for 2023 following an estimated 1.8% rise in 2022.
Note: IPOs with deal values of less than $25 million, best efforts offerings, oil and gas royalty trusts, business development companies, pricing on OTC Bulletin Board and OTC Pink Sheets are excluded from this narrative. Later-stage median valuation is as of 12/13/22. Data from SEC filings and third-party databases are as of 12/30/22.
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