Stocks continued to fall on Friday as a growing number of investment analysts issued bleak forecasts for markets and the economy this year, with some arguing that major indicators will sink deeper into negative territory as the Federal Reserve takes a more aggressive policy to fight inflation.
The Dow Jones Industrial Average fell 599 points, or 2%, to 29,477 by 1:30 p.m. Friday — surpassing an 18-month low hit in mid-June, as the Fed began a series of its largest rate hikes since 1998.
Similarly, the tech-heavy S&P 500 and Nasdaq sank 2.3% each — each plunging deeper into bear market territory, as oil prices also sank on deflation fears, with a barrel of West Texas Intermediate down 5% to Eight-month low at $79.
“The expected trajectory of interest rates is now higher than we previously assumed,” Goldman Sachs analysts led by David Kostin wrote in a note Thursday night, blaming stock declines on the Fed’s hawkish trend this week and predicting that more aggressive policy would push the S&P down another 3% this week. year — a significant turnaround from the 16% increase the team had projected last month.
“The outlook is extraordinarily ambiguous,” the team continued, saying that trajectories of inflation, economic growth, interest rates, earnings and valuations “are all in flux more than usual” and that the majority of the investment bank’s investing clients now believe a hard landing is “inevitable.”
Should the economy enter a recession, Goldman expects the S&P to fall another 10% to 3,400 by the end of the year and 17% to 3,150 over the next six months — taking a full year to recover its losses.
Others are similarly bearish: Bank of America’s Savita Subramanian forecast the S&P will drop to 3600 by the end of the year, saying more volatility is likely and noting that stocks slump during recessions with inflation rising around 11% in Madi.
What to watch
Economists at Goldman Sachs expect the Fed to raise interest rates by another 75 basis points in November, 50 basis points in December and 25 in February. If inflation continues to exceed expectations, it is possible that those expectations will escalate - which will certainly cause more trouble for the markets.
The recent market sell-off intensified after the Labor Department reported that inflation rose more sharply than expected in August, raising concerns that Fed officials may need to act more aggressively in order to cool inflation. The S&P is down 23% this year, and the Nasdaq has broken 31%. In a note to clients, Keith Lerner, chief market strategist at Truist Advisory Services, said the Fed is likely to keep interest rates high for longer in order to offset inflation challenges that have persisted for more than a year — “even if it requires more economic pain,” as Officials have been increasingly wary since last month.
According to Bank of America, fund managers are showing signs of a hard landing — liquidity is accumulating at the highest level since 2001 and limiting exposure to equities (at record lows) as global economic growth forecasts approach all-time lows in light of the central bank's efforts to tighten.
The Federal Reserve raised rates another 75 basis points - pushing borrowing costs to the highest level since the Great Recession (Forbes)
Stocks struggle as markets prepare for another 'extraordinarily large' Fed rate hike (Forbes)