Despite falling for much of the year, the U.S. stock market might decline even further rather than recover due to elevated inflation rates, according to a note by a Bank of America (BofA) strategist.
In the week ending Sept. 14, U.S. equity funds posted their largest inflows in over a month. However, stock markets came under pressure after the U.S. 12-month Consumer Price Index (CPI), a measure of annual inflation, came in at 8.3 percent in August.
This is the eighth straight month this year that the 12-month CPI has remained above 7.5 percent and is a cause of worry for investors. On Sept. 13, the S&P 500 fell by its biggest margin in a single day since June 2020.
David Lefkowitz, chief investment officer and head of U.S. Equities at UBS, has also cut down his price target for the S&P 500 from the earlier 4,300 level to 3,900.
Fed Rates, ‘Softer’ Labor MarketThe Federal Reserve has been indicating that it is willing to trigger an economic slowdown to bring down inflation—a stance that is making investors wary about the stock market.
To restore price stability, the agency has to “forcefully” bring demand and supply into a better balance. There will likely be “some softening” in labor market conditions.
“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation,” Powell said.
Due to the shortage of labor, businesses are forced to increase wages, which pushes up inflation, which then makes the Fed raise rates even more. “That’s where that recession risk comes. We’re sitting on the brink of a deeper recession because of this issue,” he said.