Bank of America warns that the stock market will decline in a stagflation scenario

The Standard & Poor’s 500 It blurred into a broad sell-off this month, and the benchmark index is likely to fall even lower if the economy sees a return to 1970s-style stagflation, according to Bank of America analysts.

In a recent analyst note, Savita Subramanian, a strategist at Bank of America, warned that a “worst-case” stagflation scenario — a rare combination of economic stagnation and high inflation — could send the S&P 500 down to 3200, a 17 percent drop. % about the current situation. Value. It would be a staggering 33% drop from the start of the year.

Standard & Poor’s 500 fell into the bear market, joined the Nasdaq

The S&P is already down just over 20% this year, officially Entering a bear market Friday afternoon for the first time since March 2020, with the onset of the COVID-19 pandemic. Rising inflation, rising interest rates and the risk of a recession have worried investors in recent weeks.

stock market falling

Traders work on the floor of the New York Stock Exchange (NYSE) on May 18, 2022 in New York City. (Photo by Spencer Platt/Getty Images)/Getty Images)

stock in this article


-33.88 (-0.30%)

So far this year, the benchmark index has fallen for seven straight weeks, its worst stretch since the dot-com bubble burst in 2001. Subramanian cautioned that investors should be careful because “recession risks are taking over,” noting that market conditions remind us of Dotcom bubble.

What is stagnation? Why do economists fear a 1970s-style catastrophe?

“In our forthcoming 2022 report, one reason for caution was the set of similarities to 1999/2000, one of which was the acceptance of the unimaginable,” she wrote.

There are growing concerns on Wall Street that the Fed may inadvertently cause a recession with its war on inflation, which rose 8.3% in April, near a 40-year high. Other companies forecasting a recession in the next two years include Bank of America, Fannie Mae and Deutsche Bank. Subramanian estimated the odds of a recession at about 40%.

Economic growth in the US is already slowing. The Bureau of Labor Statistics reported earlier this month that gross domestic product unexpectedly shrank in the first quarter of the year, marking the worst performance since the spring of 2020, when the economy was still deep in the throes of the coronavirus-induced recession.

Inflation in food prices

A man shops at a Safeway grocery store in Annapolis, Maryland, on May 16, 2022, as Americans prepare for the shock of summer posters as inflation continues to grow. (Photo by Jim Watson/AFP via Getty Images)/Getty Images)

Fed policymakers already raised the benchmark interest rate by 50 basis points earlier this month for the first time in two decades, and indicated that more rate increases of similar size are on the table at upcoming meetings as they race to catch up with inflation. President Jerome Powell He recently pledged that officials would “keep pushing” until inflation fell close to the Fed’s 2% target.

However, he acknowledged that there could be some “pain associated with” lowering inflation and curbing demand, but rejected the idea of ​​an impending recession, identifying the labor market and strong consumer spending as bright spots in the economy. However, he cautioned, a soft landing is not guaranteed.


“It’s going to be a tough job, and it’s gotten even more difficult in the past couple of months because of global events,” Powell said Wednesday during a live event in the Wall Street Journal, referring to the Ukraine war and the COVID lockdown in China.

But, he added, “there are a number of plausible paths to a quiet or quiet descent. Our job is not to thwart the odds, but rather to try to make it happen.”

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