Analysis: Wall Street heavyweights warn of pain ahead despite market’s recent reprieve

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NEW YORK, Jan. 25 (Reuters) – Some of Wall Street’s biggest names are throwing cold water at the prospect of the US economy coming through 2023 without a recession, even as hopes of declining inflation and resilient growth push stocks higher.

Banks and asset managers repeatedly calling for a recession include BlackRock, Wells Fargo and Neuberger Berman, many of whom warn that the Federal Reserve is unlikely to cut inflation without hurting economic growth.

The warnings contrast with signs of optimism in the markets. The S&P 500 is up more than 4% so far in 2023, fueled in part by bets that inflation will continue to slow, allowing the Fed to pull back quickly from the rate hikes that shocked markets last year. The tech-heavy Nasdaq 100 is up more than 7%.

“Money is dying to get back into this market, but we still think you’re going to have an economic slowdown and earnings expectations are still too high,” said Paul Christopher, head of global investment strategy at the Wells Fargo Investment Institute.

Correctly assessing the economy is crucial for investors. Stocks generally perform poorly in economic downturns, according to Truist Advisory Services, with the S&P 500 falling an average of 29% during recessions since World War II.

While recessions are referred to in hindsight, investors have said that still-vigorous job growth makes it unlikely that one has started yet.

Reuters chart

Many strategists are focused on the Fed, pointing to years of market history suggesting that the central bank’s rapid rate hikes will eventually drive up unemployment and push the economy into recession.

The Fed raised its benchmark rate from zero to between 4.25% and 4.50% last year and is widely expected to raise it by another 25 basis points at the end of its February 1 meeting.

Policymakers have predicted that their key policy rate this year would be between 5.00% and 5.25%. Market prices indicate that investors are taking a more dovish stance, peaking below 5% around mid-June before falling in the second half of the year.

This latter view is not shared by BoFA strategists, who recommended positions that would benefit from a “maling lower” in US stocks, noting that Fed cutting cycles have historically been associated almost exclusively with a recession… or a financial disaster. ,” they said.

Charlie McElligott, general manager of cross-asset strategy at Nomura Securities, believes the current rally in stocks is driven in part by under-positioned investors fearful of missing a shift to the upside over the longer term, a dynamic that fueled several rallies last year. has fueled.

Those rebounds inevitably crumbled, leaving the S&P 500 with an annual loss of 19.4%, its worst since 2008. The most recent rally has lifted the S&P 500 more than 11% from its October low.

“You are now getting the disinflationary momentum the Fed was looking for and it is ahead of schedule,” he said. “The challenge now is that people are under-positioned and… absolutely forced into a painful trade because the Fed hasn’t won the fight yet.”

The current equity rally “shows how markets are likely to react once inflation eases and interest rate hikes stop,” analysts at BlackRock, the world’s largest asset manager, wrote earlier this week. “Before this outlook materializes, we will see equities (developed markets) fall when recessions we expect to materialize.”

Neuberger Berman sees the S&P 500 fall to a low of 3,000 this year – a drop of nearly 25% from current levels – as surging inflation forces the Fed to become more aggressive.

“You need such a fall in stock prices to neutralize the wealth effect, which is the source of inflation,” said Raheel Siddiqui, a senior research analyst in the company’s Global Equity Research division.

Of course, many investors take bank forecasts with a grain of salt.

Burns McKinney, a portfolio manager at NFJ Investment Group, noted that most banks were unable to predict the wave of inflation that forced the Fed to raise rates. Strategists polled by Reuters in late 2021 saw the S&P 500 gain a median of 7.5% last year.

McKinney expects any recession to be shallow and targets industrial stocks and technology companies poised to benefit from slowing inflation.

“Stocks aren’t very cheap and they aren’t very expensive either,” he said. “There are many ways to describe Goldilocks, but the market is priced about right.”

Reporting by David Randall, additional reporting by Lewis Krauskopf and Saqib Iqbal Ahmed, editing by Ira Iosebashvili and Deepa Babington

Our Standards: The Thomson Reuters Principles of Trust.

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