S&P 500 could decline another 33% in ’70s-style inflationary environment: Societe Generale

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The bear market in stocks is probably not over yet — and could take much longer to materialize if the economy falls into a 1970s-style recession, a Wall Street strategist warned this week.

The S&P 500 officially entered a bear market last week, falling more than 20% from its record close on Jan. 3. The US equity benchmark is on course for a historically poor half-year performance as markets expect tighter monetary policy to contain inflation, but there are concerns interest rates will rise to recession-triggering levels.

“We remain on a ‘risk-off, defensive and downgrade’ mentality for 2022 as the current recession is likely to generate collateral damage from Fed hikes, prompting us to take a bearish stance on US consumer, financial and small caps Manish Kabra, head of U.S. equities at Societe Generale, said in a statement Tuesday. “But the dedicated fight against inflation is poised to trigger a domino effect, with housing and credit markets being the next domino. Looks like a fall.”

Kabra said if the Fed doesn’t hold prices, the bear market after the 1970s-style inflation shock could see the S&P 500 SPX trade 33% below its current level of 2,525.

The S&P 500 falls an average of 33% during a typical recession, but “the current 24% drop in stocks shows that we have priced in 72% of average bearish price (ie 72% bearish probability is price),” according to the firm General’s report. “At 3,200, the S&P 500 would be fully pricing in a typical recession.”

The S&P 500 fell 0.1% to 3,762 late Wednesday after Federal Reserve Chair Jerome Powell reiterated his plan to fight inflation and said the US economy could handle a sharp hike in interest rates. The Dow Jones Industrial Average remained flat near the DJIA 30,530.

Continue reading: Dow, S&P 500 rise after Powell says Fed not trying to provoke recession with higher interest rates

“We continue to see the S&P 500 fair value at 3,850 and reach 5,000 by 2024 when the inflation shock should subside and the Fed ends not only a long walk but also a cycle of rate cuts. and the US 10-year yield TMUBMUSD10Y is back close to 2%,” Kabra wrote in the report.

The yield on the 10-year US Treasury bond TMUBMUSD10Y fell 14 basis points to 3.16% on Wednesday. Treasury yield moves inversely with price.

Consumers will continue to feel the impact of rising prices amid negative wage growth for another year as retail gasoline prices hit an all-time high and mortgage rates hit their highest levels since 2008.

Continue reading: “The savings and income needed to qualify for a home loan have skyrocketed”: 5 reasons the housing market has failed buyers — and it’s not over yet

“The main reason for our US consumer slowdown is negative real wage growth over the past four quarters,” Kabra said. “In addition, real wages are not likely to turn positive until the summer of next year.”

source

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