Wall Street is feeling more pessimistic about the state of the stock market than it has been in years as investors brace for a recession amid sweltering inflation, according to Bank of America strategists.
On a new note to analysts, economists said the bank’s sell-side index – which tracks the average recommended allocation to stocks by US sell-side strategists – fell for the seventh month in a row to its lowest level in more than five years.
“We have found that the consensus distribution of shares on Wall Street has historically been a reliable contrarian indicator,” the note said. “While the SSI index does not catch every rise or fall in the stock market, historically the index has had some predictive power in terms of the 12-month total post-S&P 500 returns.”
The gauge has held steady at “neutral” levels throughout 2022 but is increasingly approaching the “buy” threshold after the recent dips. Since the index is a conflicting indicator, this indicates that investors are becoming increasingly bearish on the state of the US economy and the stock market.
The US economy enters a technical recession after growth faltered 0.9% in the second quarter
The analyst said the steady decline in the measure – the longest consecutive decline since the 2008 financial crisis – coincides with economists’ expectations of a mild recession in the latter half of the year.
At the same time, the equity risk premium rose as well, indicating that markets have used an 80% chance of a moderate contraction and a 30% chance of a “full” recession.
The analysts’ note comes just days after the Commerce Department announced that gross domestic product, the broadest measure of goods and services produced across the economy, contracted 0.9% year-on-year in the three-month period from April to June. economic output It actually fell during the first three months of the year, with GDP dropping 1.6%.
Recessions are technically defined by two consecutive quarters of negative economic growth and are characterized by high unemployment, low or negative GDP growth, low incomes and slow retail sales, according to the National Bureau of Economic Research (NBER), which tracks downturns.
Is the United States entering a recession?
With successive declines in growth, the economy meets Technical parameters of slack, which requires “a significant reduction in economic activity that is spread throughout the economy and lasts more than a few months.” However, the NBER – the semi-official verdict – may not confirm this immediately because it usually waits up to a year to be contacted.
The National Bureau of Economic Research also emphasized that it relies more on data than GDP in determining whether there was a recession, such as unemployment and consumer spending, which remained strong in the first six months of the year. It also takes into account the depth of any downturn in economic activity.
There is a growing consensus on Wall Street that the Federal Reserve will cause a recession as it battles inflation with a series of aggressive rate hikes. Policy makers approved a second consecutive rate hike of 75 basis points last week and indicated that a large-volume rate hike is on the table in September, depending on upcoming economic data.
Federal Reserve Chairman Jerome Powell told reporters that tackling inflation remains the central bank’s number one priority, even if it means risking deflation – although he stressed that he doesn’t think the US is currently in a recession.
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“We believe it is necessary for growth to slow,” he told reporters last week. “We actually think we need a period of growth below the potential in order to create some slack so that the supply side can catch up.”
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