Stormy predictions are making waves as the market heads into the second half of 2022, with all in agreement that inflation must be brought under control and supply shocks have to come to an end before things can turn around.
“We can’t afford to be fooled again on this, or else it’s going to get beyond us,” Chicago Fed President Charles Evans warned last month, fearing dreaded inflation expectations that could make it even harder to bring down prices. While a recent decline in commodities has provided slight optimism, the central bank’s monetary policy will feed directly into investing sentiment over the next six months, as well as the potential for a damaging recession.
Quote: “The good news is that H1 is now over, the bad news is that the outlook for H2 is not looking good,” wrote Jim Reid, global head of credit strategy at Deutsche Bank. “Many of the tailwinds for investment markets are now becoming headwinds.
That points to a phase of ongoing market turbulence,” added Joe Little, chief strategist at HSBC. “Investors will need to be realistic about return expectations, and they will need to think harder about diversification and portfolio resilience.”
On the economic calendar this week are minutes from the Fed’s June policy meeting tomorrow and the release of the closely-watched jobs report on Friday. Investors are already on edge following last week’s warning from Facebook-parent Meta (META), which slashed engineering hiring to prepare for “one of the worst downturns that we’ve seen in recent history.”
Meanwhile, the Atlanta Fed’s GDPNow forecast for Q2 is now pegged at -2.1%, setting up the perfect storm. It was only four days ago that the GDP tracker predicted a negative print, falling precipitously from an estimate of 2.5% growth in mid-May that flatlined by mid-June.
Tropical depression turned hurricane? “That brings us to the final question: Will equity markets rebound from the current bear market (a decline of at least 20% from the last peak), or will they plunge even lower? Most likely, they will plunge lower,” wrote Nouriel Roubini, professor emeritus of economics at NYU’s Stern School of Business. “After all, in typical plain-vanilla recessions, U.S. and global equities tend to fall by about 35%. But, because the next recession will be both stagflationary and accompanied by a financial crisis, the crash in equity markets could be closer to 50%.”