Ahead of the Federal Reserve’s highly anticipated 75 basis point hike in interest rates next week, Wall Street is divided on where the stock market will go next.
Concerns are growing that the Fed will tighten interest rates too much at a time when the economy is showing signs of weakness, which could lead to a massive stock market decline.
However, persistent inflation has some professional investors believing that the Fed must ignore stock market volatility and maintain credibility by continuing to raise rates until inflation shows adequate signs of cooling.
“Lessons from the 1970s tell us that early easing could result in another wave of inflation and that short-term market volatility can be priced in,” Bank of America’s Savita Subramanian said on Friday.
Here’s where Wall Street bulls and bears stand on inflation, interest rates and where the stock market enters the year-end ahead of next week’s FOMC meeting.
1. Ray Dalio: Expect a 20% selloff in the stock market if rates keep rising.
“With inflation well above what people and central banks want and unemployment low, it’s clear that the target issue is inflation, so it’s clear that central banks should tighten monetary policy. It all depends on that,” he said on Wednesday Dahlia.
“I estimate that raising rates from their level to around 4.5% will have about a 20% negative impact on stock prices,” Dalio said.
2. Scott Minerd: A 20% decline in the S&P 500 could occur by mid-October.
“It’s really sharp to see the price-to-earnings ratio where it is … given where the seasonals are and how far we are historically beyond where the p/e is, we should see a really sharp correction in pricing.” very quickly,” Minerd said last week.
“People seem to be ignoring the macro backdrop, the monetary policy backdrop, which would basically suggest that the bear market is intact. We may very well already be in a recession…with y-o-y core PCE now at 4.6% and the S&P 500 is trading at ~19x, we should see the stock drop another 20% by mid-October,” Minerd said.
3. Jeff Gundlach: The credit market suggests that both the economy and the stock market are in trouble.
“The credit market action is consistent with economic weakness and equity market issues. I think you have to start getting more bearish,” Gundlach said Tuesday, adding that he agreed with Scott Minerd’s call that stocks could drop 20% soon.
“You always want to own stocks, but I’m a little bit on the lighter side … buy long-term Treasuries because the risk of deflation — despite the fact that the story today is exactly the opposite — the risk of deflation is much higher today than it has been in the last two years,” Gundlach said .Gundlach believes the Fed should only raise interest rates by 25 basis points next week.
1. Tom Lee: Inflation has already peaked and that means you should be buying stocks.
“Even for those in the ‘inflationist’ camp or even the ‘we’re in a long-term bearish’ camp, the fact is that if headline CPI has peaked, the June 2022 stock lows should be sustained,” Lee said on Friday .
August’s higher-than-expected CPI report “doesn’t mean stocks have to fall below June’s lows,” Lee said, reiterating his view that the S&P 500 will rise more than 20% to new highs by the end of the year.
2. Jeremy Siegel: Inflation is falling and those who wanted to get out of stocks already have.
“It seems that everyone who wants to be out of the market is out, and everyone who wants to be tactical is short. Therefore, surprises will be up … when everyone sells, there will only be buyers left.” and the shorts are exposed,” Siegel said Monday.
Siegel said that if the Fed says rates will be higher for longer, “That would be a policy mistake. I think they will look at the economy and I hope they understand what the statistics are and what inflation is in place.” ”
3. Marko Kolanovic: The stock market will rise once inflation resolves itself.
“Given the delay needed to get a rate hike through the system, and just a month before a very important US election, we believe it would be a mistake for the Fed to increase the risk of a hawkish policy error and jeopardize market stability,” he added. Kolanovic said on Monday.
“Our expectation that the global economy will remain out of recession, increasing fiscal stimulus and still very low investor position and sentiment should thus continue to weigh on risk assets, despite the central bank’s hawkish rhetoric of late,” Kolanovič said.