Economics: return of stagflation?

Professional investors are increasingly pessimistic about the future, and most of them are now predicting that stocks will fall into a bear market this year and that the US economy will suffer from stagflation, i.e. high inflation and slow economic growth. The latest global survey of fund managers in America.

Basic moments

  • Investor sentiment is increasingly bearish as global economic growth expectations have fallen to their lowest level since the collapse of Lehman Brothers during the Great Financial Crisis of 2008, according to Bank of America’s monthly report of about 300 respondents managing $1 trillion in assets collectively. .
  • Inflation worries that seemed to ease earlier in the year returned with a vengeance in March, with more than 60% of investors expecting the US economy to suffer from stagflation, more than double the number who said so. last month.
  • With skyrocketing inflation and geopolitical uncertainty surrounding Russia’s invasion of Ukraine, which pushed the US stock market into a correction this year, fund managers are now holding more cash at an unprecedented rate. the economy plunged into a short-term recession.
  • Most professional investors again see recession risks ahead, with 60% predicting a bear market in 2022 and over 50% expecting high inflation to be “permanent.”
  • Historically, markets have not fared well in times of stagflation: when the US economy faced stagflation towards the end of Richard Nixon’s presidency, the S&P 500 fell about 17% and 30% in 1973 and 1974, respectively.
  • Despite the current uncertainty in the markets, “investors should remember not to become the worst enemy of their portfolio and let emotions drive their decision making,” says Sam Stovall, chief investment strategist at CFRA, who says there are still plenty of opportunities. in the form of high quality stocks with high dividends.

important quote

It’s hard to ignore what we see and hear from other people’s predictions. While Mr. Stovall predicts that stocks could slide into a “mild bear market” this year, “I don’t see us getting anywhere near the 1973/1974 scenario where the bear market lasted more than two years and the S&P 500 lost almost 50% of its value.”

monitor

The Federal Reserve is expected to raise interest rates by 0.25% for the first time since 2018 after the central bank concludes its two-day policy meeting on Wednesday. While many of the poll’s indicators point to a “recession” outlook, investors still expect an average of 4.4 rate hikes this year, slightly more than last month, according to the Bank of America survey.

Key context

The stock market started 2022 with difficulty, as investors were shaken not only by the Federal Reserve’s war on inflation, but also by the ongoing conflict between Russia and Ukraine, which has led to a sharp increase in energy prices. The S&P 500 is now in correction territory, more than 10% below its record at the beginning of the year, while the high-tech Nasdaq Composite is in a bear market, 20% below its November highs last year.

Contra

“The risk of a recession over the next 18 months is higher than before the Russian invasion, but the US economy is likely to continue to grow, albeit at a slower pace than initially thought. This is possible at the beginning of the year,” says a recent report. Note by Comerica Bank Chief Economist Bill Adams.

Article translated from Forbes US – Author: Sergey Khlebnikov

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