The U.S. economy may be heading for a “no landing” scenario thanks to the hot labor market, but that may not be good news for the stock market, according to Bank of America analysts.
In an analyst note published Friday, Bank of America chief economist Michael Hartnett predicted a “no landing” scenario in the first half of the year, in which there is no immediate slowdown in growth but inflation remains above trend. That will likely force the Fed to raise interest rates much higher than previously forecast – and keep them higher for longer.
“No landing means no Fed pause,” Hartnett wrote, warning that central bank tightening “always destroys something.” He estimated the S&P 500 could fall nearly 7% in early March as a result.
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|Me: DJI||DOW JONES AVERAGE||33826.69||+129.84||+0.39%|
|In: COMP||NASDAQ COMPOSITE INDEX||11787.271825||-68.56||-0.58%|
The continuation of the Fed’s aggressive campaign to raise interest rates likely means a “hard landing” result – where the economy falls into a recession – will follow in the latter part of 2023, he said.
The gloomy forecast comes after a brutal year for the stock market, the worst since the financial crisis of 2008. All three indexes fell in 2022, snapping a three-year winning streak.
The Dow Jones Industrial Average ended the year down 8.8%, the best of the three. The S&P 500 sank 19.4%, while the technology-heavy Nasdaq composite plunged 33.1%.
Stocks first rallied in early 2023, though stocks have lost some of that momentum amid fears of interest rate hikes. The S&P closed Friday up about 6.67% on the year, but down about 0.83% for the week.
Federal Reserve policymakers voted to raise rates eight times in a row to a range of 4.5% to 4.75%, signaling last month that a “couple more” increases are on the table this year.
But a number of hotter than expected financial data reports, including blowout January jobs report and a disappointing inflation report that pointed to the prevalence of high consumer prices has raised the specter of a higher top rate.
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These reports indicate that the Fed’s campaign to crush inflation is “very ill-advised,” according to Hartnett.
Hartnett is not alone in his pessimistic view: A BofA global fund manager survey published earlier this week shows that most investors are skeptical that the current stock rally will last. About 66% of respondents said stocks see a rally in the bear market — signaling they expect a return to new lows.