Traders work on the floor of the New York Stock Exchange (NYSE)David Dee Delgado/Getty Images
The stock market is poised to hit new lows later this year after the July jobs report, Bank of America said in a note on Friday.
That’s because inflation is likely to persist and the Fed will be forced to continue tightening financial conditions.
“I still think the end game is SPX [below] 3,600,” BofA said, representing a 13% downside potential.
The stock market is poised to hit a new low in 2022 as good news is now bad news for investors processing economic data, according to Bank of America’s Michael Hartnett.
In a note on Friday, Hartnett said a strong July jobs report of more than 400,000 new jobs would lead to a lower stock market over the next four weeks. July employment report Finally, 528,000 new jobs were gained, more than double economists’ estimates, as the economy proves resilient.
The S&P 500 it immediately fell 1% after the July jobs report was released before recovering some of its losses. Hartnett expects the S&P 500 to eventually trade below 3,600, representing a potential downside of 13% from current levels.
The strong jobs report means that high inflation is likely to stick around longer than most think, meaning the Federal Reserve will be forced to continue its policy of aggressive interest rate hikes in the next meeting of the Federal Open Market Committee at the end of September.
Between now and then, the Fed will have two CPI reports and the August jobs report to better assess whether it should raise interest rates by another 75 basis points to combat inflation.
Recall that the recent 14% rise in the stock market was supercharged in July by Fed Chairman Jerome Powell’s comment that the Fed will not anticipate future rate hike plans in the future and will focus solely on data incoming to make their decision, leaving the door open. for a possible pivot.
If economic data continues to be strong and inflation persists, expect more interest rate hikes that will ultimately cause the stock market to shrink, according to Hartnett.
The story continues
“[It’s] very hard on inflation [of] 2% to 3% [over the] the next 12 months without [a] great recession,” Hartnett said.
But a recession seems less likely given that the U.S. economy has added more than 3 million new jobs so far this year, helping push the unemployment rate to just 3.5% Meanwhile, unemployment insurance claims remain near historic lows. This strength in the labor market is not typical of an economy on the brink of recession.
Still, high inflation and tepid economic growth could open the door to stagnation, which Hartnett expects will return in the fourth quarter of the year and present a major short-term opportunity for investors.
“Painful meeting for many. We say undo the S&P 500 above 4,200, short the S&P 500 above 4,342,” Hartnett said.
Read the original article at Business Insider