- Shares have sold off this week amid fears of tighter monetary policy than investors had expected.
- Deutsche Bank on Tuesday predicted a coming recession and bear market.
- It is the first major Wall Street firm to make such a call. Here’s what other banks are saying.
The outlook for monetary policy—and the impact of the Federal Reserve’s approach to markets—is changing very rapidly.
At the start of 2022, most investors and the Fed itself were anticipating three 25 basis point rate hikes over the course of the year. This outlook changed rapidly, as inflation continued to rise and the central bank shifted its stance on rising prices, moving from declaring it to be a temporary phenomenon to making it its priority. absolute.
In late January and early February, banks like JPMorgan and Bank of America began raising their rate hike forecasts to six or seven, which quickly became a consensus on Wall Street.
Now the predictions are climbing even higher. Deutsche Bank is among the crowd that thinks the Fed will raise rates further, as investors anticipate 50 basis point hikes at upcoming Federal Open Market Committee meetings.
In a note to clients on Tuesday, Matthew Luzzetti, the bank’s chief U.S. economist, said he believed the Fed would raise the federal funds rate to around 2.6% this year, meaning the committee would institute the equivalent of at least 10 increases of 25 basis points.
But the outcome of this hawkish turn will not end well, he said.
“We no longer see the Fed achieving a soft landing,” Luzzetti said in a note to clients Tuesday. The term “soft landing” refers to the Fed raising rates just enough to control inflation without triggering a
“Instead, we expect more aggressive monetary policy tightening to push the economy into a recession,” Luzzetti added.
Along with that call, Deutsche Bank equity strategists Binky Chadha and Parag Thatte said in a note on Tuesday that they expect the S&P 500 to feel the pinch of an economic slowdown.
“In 2023, we expect equity markets to hold up well through the summer before the US slips into recession and equities correct 20% generally early on before hitting the bottom. mid-term bottom and regain previous levels”, Chadha and Thatte mentioned. However, both strategists are still bullish in the short term and still have a price target of 5,250 on the S&P 500 for 2022. The index closed near 4,488 on Friday.
Deutsche Bank is the first major Wall Street firm to call for a recession and
into action, and Luzzetti believes this view will eventually become a consensus. In the meantime, here’s what other Wall Street institutions are saying about the state of the economy and the stock market.
In the short term, Morgan Stanley is bearish on stocks. Their chief U.S. equity strategist, Mike Wilson, said in a note on Monday that he believed the rally in equities seen in late March was now over. His call proved correct this week, with the S&P 500 dropping about 1% to end a three-week winning streak.
“The bear market rally is over,” Wilson said in the note. “While the first quarter was tough for most stocks, the second half of March was exceptionally strong. The rally was technically predictable, but it was still a bearish rally in our view, and now we think it’s over.”
Wilson is mostly bearish as he sees economic growth slowing amid the Fed’s tightening regime, hurting earnings. This despite impressive job growth in February into March – a stronger economy now gives the Fed more leeway to tighten policy harder.
Wilson also said rising costs — for both consumers and businesses — will hurt economic growth, as will the lack of fiscal stimulus from 2021.
He said the ISM manufacturing survey is already showing an economic slowdown with declining orders and inventories. The S&P 500 typically suffers when manufacturing slows, he said.
Wilson has a price target of 4,400 for 2022 for the S&P 500.
Goldman economists say the economy is expected to experience a sharp slowdown in growth in 2022. They forecast GDP growth of 1.9% year-on-year, down from 5.7% last year. While they see growth slowing, they said in March they saw a 35% chance of a recession to come.
Goldman Sachs chief U.S. equity strategist David Kostin said in a note Monday that he sees earnings per share for the S&P 500 falling below consensus ($227) this year to $221. The relatively bearish call is due to slowing economic growth due to more hawkish monetary policy and rising commodity prices.
Still, Kostin’s 2022 price target for the S&P 500 is 4,700.
Mark Haefele, the CIO of UBS Wealth Management, said this week that he considers the economy to be healthy for three reasons: a strong labor market, robust household savings and a positive business climate.
The unemployment rate sits at 3.6%, near its pre-pandemic low; household savings remain relatively high and well protected against things like rising mortgage rates (at least for current homeowners); and despite inflation, consumer demand remains strong.
If any of those things erode, however, the economy could be in trouble, they said.
“While risks have increased and we advise investors to add hedges to their portfolios, our base case scenario remains that the US economy can avoid a recession,” Haefele said in the note.
The bank’s chief U.S. equity strategist, Keith Parker, has a price target of 4,850 2022 on the S&P 500.