Now (2022) and then (2019)

July 17, 2022

David Bailin

Chief Investment Officer and Head of Citi Global Wealth Investments

Steven Wieting

Chief Investment Strategist and Chief Economist

SUMMARY

When trying to make sense of the current market turmoil and economic uncertainty, it often helps to look at comparable periods from the past as a guide. We believe this exercise to be crucial when it comes to seeking diversification while minimizing exposure to economically sensitive sectors and regions.

The big difference between now (2022) and then (2019) is that today’s inflation is much higher than the Fed’s 2% target.
Then (2019), the Fed was receptive to the negative impacts of its own policies. The Fed recognized the damage balance sheet reduction was having on market conditions and decided to end its policy a few months early.
Now (2022), the Fed is set on a firm policy tightening course. In the absence of a rapid and sharp reversal in inflation, it is hard to imagine a scenario in which the Fed changes course without a material worsening in unemployment or credit markets.
We acknowledge that economic risks in the US are rising. However, a recession isn’t a fait accompli. If the Fed was more forward-looking and relied on data still to come, it may not need to tighten as much as it has planned. This would be a positive sign for markets and our Resilient scenario. 2019 may be a guide in this regard.
As uncertainty rises, our job is to build portfolios that seek diversification while minimizing exposure to economically sensitive sectors and regions.
We have shifted to our most cautious – but still fully invested – portfolio stance since Q1 2020. We hope that economic conditions evolve to enable 2022 to look more like 2019, but we are constructing portfolios for the economic and policy realities we face today – not for the path we wish policymakers would have taken.
At our recent Global Investment Committee, we cut our global equities allocation to neutral by taking down commodity-linked equities. We further raised exposure to high quality bonds, including US investment grade corporate securities. Details herein.