The Federal Reserve continues with its collision course with the stock markets. According to the MLIV pulse survey’s latest report, the stocks and bonds are expected to crash even as inflation seems to have peaked.
68% of the respondents feel the most destabilizing part of the price pressure will impact corporate earnings and send equities to lower prices. The majority, including strategists and traders who were part of more than 900 contributors, reckons that inflation has peaked. A whopping 84% of the respondents say that the Fed will take at least two years to bring down inflation to the targetted 2 %. In between, Consumers in the US will cut down on their spending while the unemployment rate will rise to 4%.
Investors’ skepticism after the unexpected $7 trillion stock rebound has added fuel to the bearish sentiments. The stocks fells last week, but the S&P 500 has still managed to cut the losses to 11 % against the 23% decline in the June meltdown. US futures opened lower in the Asian market.
Founder partner at G Squared Private wealth, Victoria Greene, said in an interview that the market is a trap by bears. A sustained decrease in inflation will still take time for the prices to come down.
Long way still to 2%
For dip buyers, the survey result spells trouble after they had emerged again after a disastrous first half. The shares had clawed back after worst losses while the 10-year treasury bond yield fell to 3 % From a peak of 3.5% early this year.
MLIV respondents think the bond prices will dip again next month as Fed Chair Jerome Powell will get a chance to renew expectations of a hawkish market when they meet in gathering in Jackson Hole this week.
Traders’ position on Fed funds futures bet on the Federal Reserve hiking rates to stop at 3.7%. It is expected to start to bring down from May 2023, even though Neel Kaskari, the Fed President of Minneapolis, recommends a 4.4% rate by the end of 2023.
It is obvious why all these speculations matter. Faster monetary policy tightening means a resultant fallout on the economy. For global money managers, the risk is bigger as interest rates are key drivers for corporate valuations. As per the survey, participants feel inflation will impact the margins and push stocks down. Though the impact of inflation on profitability is still an open-ended question, most of the respondents in the MLIV survey are leaning towards the bearish end of the debate on Wall Street as to where the stocks are headed.
According to most respondents, consumers will likely reduce spending as prices remain elevated in the next six months. Warnings from Walmart Inc., the largest retailer in the world, are aligned to the fact that shoppers are only paying for essentials and cutting back on discretionary items. A cutback in consumer spending will affect the profits of S&P 500 companies that are already struggling with rising inventories, higher wages, and supply chain issues from China.
