Stocks closed at their lowest level in more than a year on Friday as a growing number of investment analysts released grim projections for markets and the economy this year, with some arguing major indexes will plunge deeper into negative territory as the Federal Reserve tees up a more aggressive policy to fight inflation.
The Dow Jones Industrial Average fell 486 points, or 1.6%, to 29,590 on Friday—eclipsing an 18-month low set in mid-June, as the Fed kicked off a series of the biggest interest rate hikes since 1998.
The S&P 500 and tech-heavy Nasdaq similarly sank about 1.7% and 1.8%, respectively—each plunging deeper into bear market territory, as oil prices also sank on fears of an economic contraction, with the price of a barrel of West Texas Intermediate tanking 5% to an eight-month low of $78.
“The expected path of interest rates is now higher than we previously assumed,” Goldman Sachs analysts led by David Kostin wrote in a note Thursday night, blaming the stock declines on the Fed’s hawkish pivot this week and forecasting that more aggressive policy will push the S&P down another 3% this year—a dramatic shift from the 16% increase the team projected last month.
“The outlook is unusually murky,” the team continued, saying that the paths of inflation, economic growth, interest rates, earnings and valuations “are all in flux more than usual” and that a majority of the investment bank’s investor clients now believe that a hard landing is “inevitable.”
In the event the economy falls into a recession, Goldman projects the S&P to plunge another 10% to 3,400 points 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 also projected the S&P would fall to 3,600 by the end of the year, saying that more volatility is likely and pointing out that stock declines during recessions with high inflation have amounted to about 11% in the pass.
What To Watch For
Goldman economists project the Fed will hike rates by another 75 basis points in November, 50 basis points in December and 25 in February. If inflation continues to exceed expectations, those projections could ramp up—surely spelling more trouble for markets.
The recent market sell-off intensified after the Labor Department reported inflation rose more sharply than expected in August, fueling concerns that Fed officials may need to act more aggressively in order to quell inflation. The S&P has plunged 23% this year, and the Nasdaq has cratered 31%. In a note to clients, Keith Lerner, chief market strategist at Truist Advisory Services, said the Fed will likely keep interest rates elevated for longer in order to offset the inflation challenges that have lingered for more than a year—”even if it requires more economic pain,” as officials have increasingly warned since last month.
According to Bank of America, fund managers are showing signs of extreme bearishness—piling up on cash at the highest level since 2001 and limiting exposure to stocks (at record low levels) as global economic growth expectations near an all-time low in light of central bank tightening efforts.
Fed Raises Rates Another 75 Basis Points—Pushing Borrowing Costs To Highest Level Since Great Recession (Forbes)
Stocks Struggle As Markets Brace For Another ‘Unusually Large’ Fed Rate Hike (Forbes)