Investors expect a tough year in 2022, where inflation will cause a recession, which in turn will cause another correction in the stock market, Bank of America said in a note to clients, which was reproduced by Business Insider.
“Inflation causes recessions,” BofA stated bluntly, “and right now, inflation is out of control,” according to the note.
Inflation has soared amid renewed consumer demand as Covid-19 recedes, combined with ongoing supply chain disruptions and a surge in commodity prices due to the invasion of Ukraine by part of Russia.
Prices are rising at a rate not seen in more than 40 years.
Almost all previous recessions have been preceded by sudden increases in inflation, including in the late 1960s, early 1970s, and in 2008.
“The latest falling dominoes in terms of recession expectations are higher yields and a weaker dollar,” BofA explained.
Below 4,000 points
After the “inflationary shock” comes the “rate shock”, which will finally lead to a “recession shock”, according to the US media note.
That downturn will see the S&P 500 drop below the key 4,000-point level by the end of 2022, BofA said, representing a potential drop of 11% from current levels.
Currently the issue of interest rates is the most important for investors. This especially after the minutes of the last meeting of the Committee of Open Markets of the Federal Reserve released in the middle of last week, where it was indicated that the US central bank could raise interest rates by 50 basis points in May.
The minutes also revealed the Fed’s plan to shrink its balance sheet by $95 billion a month by the end of this year.
Any drop in the S&P 500 to new lows this year would serve as a significant whiplash for investors, but would align with a 100-plus-year bear market indicator that is prompting many traders to take a potential recession seriously: the sharp massive sell-off in transportation stocks, known as the Dow Theory, BofA said in its report.