Bank of America lowers S&P 500 target as risk of recession increases with high inflation

Bank of America lowers S&P 500 target as risk of recession increases with high inflation

If you’re worried about your portfolio, you may want to hold off checking it when markets first open.

For the past two days, markets had rocky starts sliding more than 1%. But around noon the tides started to turn and carry through the rest of the day. 

The Dow Jones Industrial Average, which was down almost 2% earlier in the day, closed down 0.5% lower. The index is down nearly 17% from its January peak. Similarly, the S&P 500 closed down 0.3% and the Nasdaq Composite ended the day 0.1% higher.

This volatility comes after the Consumer Price Index soared to 9.1% in June, a much hotter than expected reading. 

“The message from yesterday’s CPI inflation report is clear: inflation is broad-based, much too high, and likely to remain well-above target until Fed policy rates move into restrictive territory,” Citibank economists said in a note to clients on Thursday.

What will the Fed do?
Now, investors are bracing for a steep rate hike later this month.

Christopher Waller, a member of the Federal Reserve’s Board of Governors, said Thursday that he would be open to supporting such a move if upcoming economic data points to robust consumer spending.

Some analysts predict the Fed will follow in the footsteps of the Bank of Canada and interest raise rates by 100 basis points or 1%. That would be the largest rate hike since the 1980s. Citibank economists said they see it as “the most likely outcome.” 

But a vast majority of analysts believe that the Fed will raise rates by another 75 basis points when they meet in two weeks. 
Generally, rate hikes negatively affect stocks in the near term because it makes it more expensive for investors to get financing which leaves them with less money to invest. But over time stocks historically perform well after the Fed hikes interest rates. But the rate hikes could push the economy closer to a recession, many economists fear.

After Wednesday’s CPI report, analysts at Bank of America lowered their year-end target for the S&P 500 to 3600 from 4500, a 25% decline. That’s still below the 31% average decline during recessions.