More struggles ahead as U.S. equities get crushed amid rising recession fears

(Xinhua) 09:33, June 21, 2022

NEW YORK, June 20 (Xinhua) -- Elevated inflation and concerns over a more hawkish Federal Reserve have sent U.S. equities into a tailspin, leaving behind another dreadful week for the three major averages.

Analysts warned of a bumpy road ahead as an aggressive Fed policy, slower economic growth and higher risks will likely pressure stocks.

For the trading week ending Friday, the S&P 500 shed 5.8 percent, booking its worst week since March 2020. The Dow fell 4.8 percent, seeing its biggest weekly percentage decline since October 2020 and posting its 11th negative week in 12. The tech-heavy Nasdaq also lost 4.8 percent.

The U.S. stock market met popular criteria for a bear market during the week as the latest slides brought the S&P 500 to drop more than 20 percent from its record close in January. A bear market is commonly defined by a fall of at least 20 percent from a recent peak.

The market carnage came amid growing fears that drastic rate hikes may trigger a recession.

The Fed on Wednesday raised the federal funds target range by 75 basis points, the largest hike since 1994, to a range of 1.5 to 1.75 percent as it races to fight inflation that is running at a multi-decade high. Meanwhile, it left the door open for a similar increase at its next meeting in July.

Its updated economic projections pointed to a likely slowdown in the economy. The median Fed projection puts the fed funds rate at 3.4 percent by the end of the year, much higher than the 1.9 percent projected in March. GDP growth is expected to slow to a below-trend rate of 1.7 percent.

"The Fed's message seems clear: It is solely focused on containing inflation, and it is willing to harm growth to do it," Jacob Manoukian, U.S. head of Investment Strategy for J.P. Morgan Private Bank &Wealth Management, said Friday in an analysis.

"Many investors are now assuming that a recession is necessary to cure the inflation problem," he said.

The aggressive Fed action raised concerns that "they may reduce demand so much to where we fall into a recession," said Kevin Matras, executive vice president at Zacks Investment Research.

The Fed's decision came after the May U.S. consumer prices index report showed inflation moving up to 8.6 percent year over year, a new high for this year and a 41-year high overall.

In addition, the University of Michigan's monthly consumer sentiment survey also showed that longer-term inflation expectations increased to 3.3 percent from 3 percent, the highest level since 2008.

Experts noted that inflation would continue driving monetary policy. The Fed will likely continue its hawkish stance until there is more explicit evidence of a deceleration in inflation.

"As the Fed presses on the brakes harder, financial conditions become tighter and the chances of recession grow," said Ned Salter, global head of Investment Research at financial services company Fidelity International.

Goldman Sachs' June Marquee QuickPoll survey showed that investors expect the U.S. economy to enter a recession sooner, with 72 percent of respondents expecting a recession in 2022 or 2023, up from 66 percent last month. The survey also found that a growing number of investors expect inflation to remain elevated for longer.

While the stubbornness of high inflation indicates the potential for a more hawkish central bank policy, whether the economy can withstand the sharp tightening path that markets expect is up for debate.

There were already mounting signs of a loss of growth momentum in the U.S. economy. Data released on Wednesday showed U.S. retail sales in May falling for the first time in five months as consumers cut back on purchases of electronics and cars. The housing market, the U.S. economy's most interest-rate-sensitive sector, is cooling, with U.S. housing starts plunging 14.4 percent last month to a 13-month low.

"With the Fed putting even greater emphasis on fighting inflation, the risks to economic activity are rising," said analysts at UBS, noting that "higher borrowing costs tend to lead to a slowdown in economic growth."

Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, cautioned that investors should be prepared for a "profits recession," as "weaker earnings-and more volatility-may be ahead."

"The Fed is still accelerating its rate hikes, and it has only just begun to shrink its balance sheet. The next phase of market adjustment will likely be a reckoning with the impact of higher rates and lower liquidity on the economy and company earnings," she said.

Larry Benedict, CEO &founder of The Opportunistic Trader, a U.S. market research firm, told Xinhua there could be some "short-lived" rallies, but "for the long run, the market has some severe problems."

"I do think we're going to end the year near the lows than the highs," he said.

In a report published last week, UBS analysts lowered their December 2022 S&P 500 target price from 4,300 to 3,900, noting stronger headwinds for U.S. equities.

"In our downside scenario, we would expect the S&P 500 to reach 3,300," representing a 31-percent drawdown from the market peak earlier this year, the analysts said, adding, "currently, our economists still believe a soft landing is the most likely outcome for the economy." 

(Web editor: Peng Yukai, Liang Jun)


Related Stories