Investment strategy
August 7, 2022
2 mins

Attention investors: That was not a recession

August 7, 2022
2 mins
David Bailin
Chief Investment Officer and Head of Citi Global Wealth Investments
Steven Wieting
Chief Investment Strategist and Chief Economist
SUMMARY

The recent stock market rally suggests there is a recovery underway from a recession that hasn’t happened yet. This is not a recession, nor have we just had one.


  • The July payrolls proves the US is still growing. Non-farm employment jumped by 528,000 in July.
  • Tighter financial conditions this year will affect labor markets negatively in 2023. We expect that there are employment declines to come, assuming the Fed does not pause its rapid tightening path. While Friday’s employment data was widely viewed as too strong for the Fed to ignore, recent market action suggests many think that much of the Fed’s work has already been done.
  • We are skeptical the Fed will pause its tightening soon. Its 2% inflation target isn’t yet visible – primarily because it’s looking backwards and sees a 5.4% increase in the CPI in the first half of 2022.
  • We think the Fed will stay resolute in its inflation fight until it sees employment dropping or disorder in credit markets – neither of which are likely in the near term. This makes a shallow recession likely.
  • The rise in US Treasury yields on anticipated Fed tightening points to at least a modest decline in profits in the coming year. Thus, we are focused on equities with the most secure dividends and investment grade US bonds.
  • Investors should remember that bear market rallies are common – and can be painful for those who shunned risk or shorted assets that have risen. We are not all clear at this time.
  • This week’s CIO Strategy Bulletin attempts to lay out the countervailing forces at work and explains why investors should not assume the Bear Market rally we are all experiencing will continue into the fall.

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