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October 2022

CEO Letter from Garrett R. D'Alessandro Q3 2022

Key Points

  • US recession risk rises to 60%
  • The Fed has a long way to go to meet inflation target
  • Proactively adjusting portfolios to mitigate risk

What Lies Ahead

The Federal Reserve and the US government took extraordinary monetary and fiscal actions at the start of the COVID-19 outbreak that materially lessened the pandemic’s harmful effects on individuals and businesses. There was strong justification for these initial actions. However, as the pandemic progressed and it became increasingly likely that the economic threat was abating, more fiscal responsibility by the government would have been justified. The Fed also could have pre-empted the stimulative effects of excessive policy easing that were clearly driving prices higher across major sectors of the economy, including the stock market, housing, commodities, labor and bitcoin.


The economy is now experiencing the inflationary outcomes of too much money stimulating prices combined with another consequence of the COVID-19 pandemic, a severe labor shortage that has caused wages to increase at rates not experienced in decades. The inflationary implications of this will require the Fed to raise interest rates until labor demand slows enough to reduce wage gains to a level compatible with Fed’s 2% inflation target.

The impact of the Fed’s belated response to inflation has been negatively felt across financial markets in 2022. We have now reversed two years of stock market appreciation and seen bond values experience one of their worst performances in our lifetime. What lies ahead? For some time now, CNR has maintained above-consensus views on recession probability, the upward path of interest rates and geopolitical risks. It is now clear that central banks around the world will raise interest rates even further than our above-consensus forecasts had implied, making the current tightening cycle the most aggressive in three decades. Given this, we now see the global economy entering recession next year and the probability of recession in the US rising to 60%.

The prospect for continued tight monetary policy leads us to be more concerned than consensus views of economic and corporate profit growth. Until consensus expectations better align with potential risks, we believe further downside in financial markets is possible. Over the last two quarters, CNR has taken proactive actions across our investment strategies to mitigate our concerns. This includes reducing exposure to economically sensitive US equities, eliminating European and Asian equities, and increasing allocations to investment grade and high yield municipal bonds. In the near term, we expect markets to remain volatile as investors gain greater clarity on the path of rate hikes and inflation, and weigh their implications for the economy and corporate profits. Nonetheless, our focus on holding high quality US stocks and bonds through this period continues to give us confidence in achieving your individual long-term goals.


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