Citi Global Wealth overview | | 7 Investments We believe that the Fed’s rate hikes and shrinking bond portfolio have been First, though, we need to get through a recession in the US that has not stringent enough to cause an economic contraction within 2023. And if started yet. We believe that the Fed’s current and expected tightening will the Fed does not pause rate hikes until it sees the contraction, a deeper reduce nominal spending growth by more than half, raise US unemployment recession may ensue. The most recent inflation data and Fed minutes above 5% and cause a 10% decline in corporate earnings. The Fed will likely suggest that the Fed is aware of these risks. Yet Fed policymakers’ tendency reduce the demand for labor sufficiently to slow services inflation just as toward excess gives us pause as we plan for 2023. high inventories are already curtailing goods inflation. With perfect hindsight, sitting out 2022 would have been worthwhile. But The relative health of corporate and personal balance sheets has delayed to think that way is dangerous for wealth preservation and creation. One an economic downturn, for now. Household borrowing is sustaining growth year is just a “moment” in the lifetime of a portfolio. Sidestepping the presently, but this dissaving is likely unsustainable, especially given financial pandemic and war-laden past three years would have been a major mistake market and real estate price deflation. Also, when short-term rates are for equity investors. Between December 2019 and November 2022, the S&P higher, there is a natural bias to deferring purchases. 500 Index rose 25% and the MSCI World 15.4%. For 2023, we reiterate the fundamental wisdom of keeping fully invested portfolios – see for example, It We remind investors that over the past 100 years, no bear market associated is time to put excess cash to work. with a recession has bottomed before the recession has even begun. (Of course, there is a first time for everything.) We believe that the current bear Remember, the world economy is highly adaptive and resilient. So too market rally is based on premature hopes that the recession will not occur – are markets. a so-called “soft landing” – and that there will not be a meaningful decline in corporate earnings. Thinking about 2023 Second, we need to get through a deeper recession in Europe as it struggles through a winter of energy scarcity and inflation. We also need to see a Markets in 2023 will lead the economic recovery we foresee for 2024. sustained economic recovery in China, whose prior regulatory policies and Therefore, we expect that 2023 may ultimately provide a series of current COVID policies curtail domestic growth. meaningful opportunities for investors who are guided by relevant Third, we need to see the Fed truly pivot. Ironically, when the Fed does finally market precedents. reduce rates for the first time in 2023 – an event that we expect after several negative employment reports – it will do so at a time when the economy is already weakening. We think this will mark a turning point that will portend the beginning of a sustained economic recovery in the US and beyond over the coming year.