Wall Street Week Ahead: Recession? Soft landing? Stagflation? Investors assess the strength of the economy


The floor of the New York Stock Exchange (NYSE) is seen after the close of trading in New York, US, March 18, 2020. REUTERS/Lucas Jackson/File Photo

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NEW YORK, July 8 (Reuters) – With a miserable first half for the stock market now in the history books, investors assess whether the US economy can avoid a significant downturn as the Federal Reserve raises interest rates to combat the worst inflation in decades .

The answer to that question will have a direct impact on the markets. Strategists say an economic slump combined with weak corporate earnings could lower the S&P 500 (.SPX) by at least another 10%, adding to the losses that have already cut the benchmark index by 18%.

Conversely, in a scenario of brisk earnings gains and moderate inflation, stocks could bounce around where they started the year, according to some analysts’ price targets.

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For now, “investors expect to see a slowdown,” said Lindsey Bell, chief markets and money strategist at Ally. “The big question is how deep will this slowdown be?”

The plea for an impending economic downturn took a hit on Friday after a Labor Department report found that employers hired far more workers than expected in June, giving the Fed ammunition to push another 75 basis point rate hike this month. . read more

“The June employment report indicates that the economy is not on the brink of recession — let alone one already — nor in an overheated state,” Oxford Economics said in a note.

It predicted more market volatility “amid heightened speculation about what the Fed will do.”

More important information on the economy is expected later this month as second-quarter earnings reports pour in over the coming weeks and investors analyze new data, including Wednesday’s closely watched consumer price report for June.

While the Fed has said it is confident in achieving a so-called soft landing by curbing inflation without disrupting the economy, some investors believe this year’s sharp declines indicate that a degree of economic slowdown has already started in the asset prices is ingrained.

For example, the S&P 500 (.SPX) is down to 23.6% from its all-time high in January this year, in line with the median drop of 24% the index has recorded in past recessions, indicating that “at least a Part of the challenging environment is reflected in stock prices,” Keith Lerner, co-chief investment officer at Truist Advisory Services, said in a report.

Recessions are officially termed retrospectively, and the National Bureau of Economic Research declares one when there is a “significant decline in economic activity that spreads across the economy and lasts for more than a few months.” read more

COMPETITION SCENARIOS

Forecasts vary for how rocky the economy could get.

A note outlining various economic scenarios from UBS Global Wealth Management said the S&P 500 could fall to 3,300 — about 31% from its January high — if an economic slump leads to a sharp drop in corporate earnings, as well as in the case of “stagflation”. ‘, which is usually accompanied by a cocktail of persistently high inflation coupled with sluggish growth.

The bank’s analysts gave a 30% chance of the ‘slump’ scenario and kept the chance of stagflation at 20%.

However, a “soft landing” scenario is their most likely outcome, with the S&P 500 ending the year at 3,900 – right around where it closed on Friday. read more

Such a scenario, to which UBS assigns a 40% weighting, depends on investors believing inflation is under control and earnings can remain resilient despite tightening financial conditions, they said.

In a recent note outlining the “rising likelihood of a stagflationary environment,” BofA Global Research strategists advised investors to combine parts of the stock market that would benefit from inflation, such as energy, with defensive sectors such as healthcare.

Earlier this week, strategists at the Wells Fargo Investment Institute called for a “moderate recession in the US” and lowered their target for the S&P 500 for the year to a range of 3,800 to 4,000.

Some investors have a more optimistic view of the economy and believe that stocks could move up from current levels.

Citi’s strategists weighed a soft landing scenario at 55%, although they also saw a 40% chance of a mild recession and a 5% chance of a severe one. Their S&P target for the year is 4,200.

John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, this week cut his S&P 500 price target of 4,800 from 5,330 he set in December — with the new level still 23% above where the index closed on Friday.

He expects consumer demand, business investment and government spending to support growth.

“It’s a resilient economy,” Stoltzfus said.

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Reporting by Lewis Krauskopf in New York Editing by Ira Iosebashvili and Matthew Lewis

Our Standards: The Thomson Reuters Trust Principles.

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