Investment strategy
November 20, 2022

The US: Bear today, bull tomorrow

November 20, 2022
David Bailin
Chief Investment Officer and Head of Citi Global Wealth Investments
Steven Wieting
Chief Investment Strategist and Chief Economist
SUMMARY

As the equity market is experiencing what appears to be the third bear market rally of 2022, it’s useful to understand the bull and bear views and how we see reality.


The bull case: Bearish sentiment – a positive sign for equities – has been rising sharply this year. A year ago, 24% of investors said they were “bullish.” Today, net bearishness is -22% -- and that’s after the S&P has dropped by 18%.

The bear case: There is enough data to suggest a sharp economic slowdown will unfold in 2023: the Fed will likely raise rates further as it also reduces liquidity. Quantitative Tightening will shrink money supply and credit outright, forcing banks to tighten lending standards. And remember, in the last 100 years, equities have never reached bottom before a recession started.

In our view, the powerful impact of the Fed’s rapid rate increases can’t be underestimated. With a dramatic rise in yields, the economy will weaken. We expect earnings to contract 10% in 2023, after rising 6% this year.

We will overweight equities during the trough of the recession – and we’ll seek even stronger opportunities in riskier market segments in the coming year.

The bull is in China’s shop

US investors have had a rough year, but investors in Chinese equities have suffered through two painful years of a bear market. In the 20 months through October, the MSCI China Index plunged 63%.

Since the start of November, there’s been a decisive turn in China policy meant to address key issues required for a recovery. In the past two weeks officials have announced 20 measures to ease China’s zero Covid policy, the biggest drag on the economy and consumer sentiment. Financial authorities have also put forward policies to support a recovery in the beleaguered property market, including easing purchase and mortgage restrictions and protecting borrowers’ credit scores. And on the geopolitical front, Presidents Xi and Biden met at the G20 and agreed to soften bilateral tensions.

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