Investment strategy
June 19, 2022
3 mins

The Fed’s emergency room

June 19, 2022
3 mins
David Bailin
Chief Investment Officer and Head of Citi Global Wealth Investments
Steven Wieting
Chief Investment Strategist and Chief Economist
SUMMARY

The only way for markets to recover quickly is for recession to be definitively avoided. We do not believe that inflation will fall fast enough for the US Federal Reserve to recognize the cumulative impact of its actions in time to moderate its policies. Thus, the likelihood that the Fed will swerve away from a dangerous course for the economy appears to be falling.


  • Bearing this in mind, we have raised the forecast of recession in 2023 to 40% from 35%. This is barely below the 45% we assign to the “resilient” scenario of slow growth and gradual deceleration in inflation over the course of 2022-23.
  • Typically, the Fed watches data carefully and considers this forward-looking impact. With so much of the present mismatch in supply/demand out of the Fed’s control, for it to be the cause of a major recession would be both unusual and undesirable.
  • Pro-cyclical Fed policy warrants higher US fixed income allocations and cautious equity positioning. As such, and despite the sharp correction so far this year, we’ve chosen to keep our tactical focus on high-quality US fixed income and equities with the strongest dividend yields in industries with robust durable demand.
  • We believe US investment grade bond yields offer a more compelling return for the economic environment ahead. Those sitting on the sidelines may be sorely disappointed that their uninvested cash never catches up.
  • Ultimately, we expect the powerful interest rate shock of this year to be self-limiting. Both home sales and construction are now falling even as the full impact of the latest sharp rise in mortgage rates has not been fully felt. With the Fed tightening through both reduced lending and higher interest rates, we expect peak rates to be achieved in 2022.
  • Unlike the period in 2000-2002, even if the US economy contracts, we do not expect a “tech led” recession. It will take some time for investors to regain visibility on EPS trends unless the Fed changes course quickly. However, we would expect the EPS trough for many technology firms to be a “high trough” compared to many cyclical industries. In a recession scenario, there will be some “overshooting” in all shares, but the time to add quality growth shares is likely to come before 2023.
  • As we discuss in Mid-Year Outlook 2022, investors 20 years ago who did not have the patience to wait or the courage to re-engage with the investments responsible for true growth and innovation missed out on the strongest returns of the two decades past. Today, we don’t advocate a wild swing toward such investments or away from them.
  • We will also accumulate shares in beaten-down secular growth industries such as cyber security software, which has fallen 20% in 2022 even with no loss of business activity.

Insights

See our investments insights and the issues that matter for your wealth.

View all insights

Insights

See our investments insights and the issues that matter for your wealth.

View all insights