Former Chairman of the Council of Economic Advisers Kevin Hasset discusses the testimony of Fed Powell President Capitol Hill, Biden, accusing Putin of raising prices, the meeting of oil leaders in the White House and the risk of recession in the United States
The S&P 500 was crushed in widespread sales this month, and the benchmark index is likely to fall even lower if the economy falls into recession, according to Morgan Stanley analysts.
In a recent note from analysts, Morgan Stanley strategists, led by Mike Wilson, said the risks of a decline had risen significantly and that stocks could fall another 20% if economic growth stopped.
“At this point, the recession is no longer just a tail risk, given the Fed’s difficulty with inflation,” Wilson wrote in the analyst’s note. He predicts a 35% chance of a decline next year, sharply compared to his previous estimate of 20%.
The index has already fallen in recent weeks due to concerns hotter than expected inflation, rising interest rates and dimming economic outlook continue to weigh on the market. The S&P 500 is down about 21% from the end of 2021, officially in a bear market, but Wilson said markets are not actually pricing in the face of the real threat of recession.
FED INCREASES INTEREST RATE BY 75 BASE POINTS IN HISTORICAL MOVEMENT TO FIGHT INFLATION
Traders work on the floor of the New York Stock Exchange (NYSE) on June 10, 2022 in New York. (Photo by Spencer Platt / Getty Images) / Getty Images)
If the US economy really starts to shrink, the S&P 500 is likely to fall sharply to about 3,000 – by about 20% of current levels, according to Wilson.
Even if the economy manages to escape the recession, Wilson sees more downsides to equities: S&P’s benchmark is still likely to fall another 7% to 10% as markets absorb what are likely to be weak corporate profits.
“We acknowledge that a lot of pain has already been inflicted during this bear market. However, we still cannot become bullish,” he said in a note. “We see a very low remuneration for the risk in the next 3-6 months, as the risk of recession increases in the face of very persistent inflation.”
The analyst’s note comes just a week later The Fed voted to raise interest rates with 75 basis points for the first time since 1994, highlighting how serious politicians are about tackling the inflation crisis following a series of worrying economic reports. This move puts the basic reference rate of federal funds between 1.50% and 1.75%, the highest since the pandemic began two years ago.
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Federal Reserve Board Chairman Jerome Powell is expected to testify before Congress on economics on Thursday, June 23, 2022 (AP Photo / Jose Luis Magana / Associated Press)
There are growing fears that the Fed will cause a recession. Rising interest rates lead to higher interest rates on consumer and business loans, which slows the economy, forcing employers to cut costs. Bank of America, as well as Fannie Mae and Deutsche Bank, are among the Wall Street firms that forecast a decline over the next two years.
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Chairman of the Fed Jerome Powell acknowledged that the US Federal Reserve’s war on inflation could force politicians to raise interest rates so high as to plunge the US economy into recession.
“It’s certainly possible,” Powell told lawmakers Wednesday as he testified on Capitol Hill. “We are not trying to provoke and we do not think we will have to provoke a recession, but we believe that it is absolutely necessary to restore price stability, really in favor of the labor market, as well as everything else.
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