S&P 500 to fall 11% as inflation triggers recession

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  • Stocks are in for a world of pain in 2022 as an inflation-induced recession causes a bear market.
  • That’s according to Bank of America, which sees the S&P 500 falling below 4,000 later this year.
  • “Hawkish Fed now wants to fix the problems of wealth inequality and inflation…starts with an overvalued stock market,” BofA said.

Investors are in for a world of pain in 2022 due to induced inflation


recession

will trigger another stock market correction, Bank of America said in a Friday note.

“Inflation causes recessions,” BofA said bluntly, and right now inflation is “out of control,” according to the note.

Inflation has accelerated amid renewed consumer demand as COVID-19 recedes, combined with continued supply chain disruptions and a surge in commodity prices due to the invasion of the coronavirus. Ukraine by Russia. Prices are rising at a rate not seen in over 40 years.

And nearly every previous recession has been preceded by inflationary spurts, including the late 1960s, early 1970s and 2008. “The last dominoes to fall in terms of recession expectations are higher yields. high and a weaker dollar,” BofA explained.

After the “inflation shock”, comes the “rate shock”, which will eventually lead to a “recession shock”, according to the note. And that recession will push the S&P 500 below the key 4,000 level by the end of 2022, BofA said, representing a potential decline of 11% from current levels.

Interest rates are a priority for investors, especially after


Federal Reserve

minutes, which revealed that the Fed plans to raise interest rates by 50 basis points in May. The minutes also revealed the Fed’s plan to shrink its balance sheet by $95 billion a month later this year.

The Fed’s balance sheet had climbed to $9 trillion from pre-pandemic levels of around $4 trillion. “The Fed’s balance sheet of $9 trillion is expected to fall to $6.5 trillion by the end of 2023. Quantitative tightening [is the] contrary to quantitative easing [which means] higher bond yields and


volatility

“, said BofA.

“Quantitative easing was very bullish [for] Financial assets. Quantitative tightening by design will be negative [for] financial assets,” BofA explained. The Fed’s practice of buying fixed income securities over the past two years was designed to provide


liquidity

to the credit markets so that companies can take on debt in the context of a global pandemic. This increase in liquidity tends to trickle down to stocks, creating buying pressure and pushing prices higher.

“[A] The new era of a belatedly hawkish Fed that suddenly wants to address wealth inequality and inflation issues via monetary policy begins with an overvalued stock market,” BofA said.

This thinking lines up with former Fed Chairman Bill Dudley, who said in an op-ed earlier this week that the Fed needed to cause pain in the stock market to help bring inflation under control.

“One thing is certain: to be effective, [The Fed] will have to inflict more losses on stock and bond investors than it has so far,” Dudley said.

Ultimately, any decline in the S&P 500 to new lows this year would be a major boost for investors, but it would align with a 100-plus-year-old bear market indicator that is prompting many traders to take a possible recession seriously: the strong sell-off in transportation stocks, known as the Dow theory.

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