Stocks Heading to New Lows as Inflation 'Ain’t Over': Bank of America

Stocks Heading to New Lows as Inflation 'Ain’t Over': Bank of America
Traders work on the floor at the New York Stock Exchange in New York on Aug. 10, 2022. (Seth Wenig/AP Photo)
Naveen Athrappully

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.

Warning that the “inflation shock ain’t over,” strategist Michael Hartnett highlighted that past bear markets show the average peak-to-trough declines of the S&P 500 to be around 37 percent over 289 days, according to Bloomberg. This suggests that the current bear market is estimated to end in October, with the S&P 500 at 3020 points, he calculates. As of Sept. 16, the index is at 3,873. For Hartnett’s forecast to come true, the large-cap benchmark has to decline by 853 points or by 22 percent.

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.

The reduction in price target is a reflection of lower S&P 500 EPS (earnings per share) projections due to “hotter-than-expected inflation,” the strategist said in a note to clients, according to Investing.
“Until inflation improves or there is a dovish shift in Fed policy, U.S. equity markets are unlikely to experience meaningful and sustained upside in the near term,” Lefkowitz wrote.

Fed Rates, ‘Softer’ Labor Market

The 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.
In a speech at the Fed’s annual symposium in Wyoming in late August. Fed Chair Jerome Powell said that reducing inflation likely requires a “sustained period of below-trend growth.”

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.

In an interview with Fox News, Brian Brenberg, an executive vice president and associate professor of Business at King’s College, pointed out that job vacancies in the country rose by almost 200,000 from June to July.

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.