recession s&p 500

The S&P 500 has whipsawed in 2022. After entering into a bear market in June, the index rebounded in July to have the best month since 2020. Stocks have now pared their August gains and Bank of America has warned of further downside in the S&P 500, while multiple economists fear a recession.

US stocks were looking strong in August but the Federal Reserve played a party pooper. Last Friday, Fed chair Jerome Powell made hawkish comments at the Jackson Hole Symposium after which the S&P 500 fell more than 3%.

At the Symposium, Powell said, that this is “no place to stop or pause.” Powell added, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.” Powell termed these “the unfortunate costs of reducing inflation,” adding “But a failure to restore price stability would mean far greater pain.”

Notably, the S&P 500 had fallen in the week before also after Fed’s July minutes were released. The minutes showed that the Committee members favor higher rates and many even want an even aggressive tightening to tame inflation.

Steve Hanke Warns of a Massive Recession in 2023

The US economy contracted in the first and second quarters of 2022. However, the NBER (National Bureau of Economic Research), which officially declares a recession in the US, looks at several other indicators, including personal expenditure and employment.

While the Biden administration has time and again tried to downplay recession fears, several brokerages, including Citi have raised their odds of a recession amid high inflation and Fed’s rate hikes.

Steve Hanke, a professor of applied economics at Johns Hopkins University, has forecast a recession in 2023. Speaking with CNBC, he said, “We will have a recession because we’ve had five months of zero M2 growth, money supply growth, and the Fed isn’t even looking at it.” M2 is a wider indicator is money supply in the US economy.

S&P 500 Is in the Red as Recession Fears Rise

David Rosenberg, president of Rosenberg Research is also critical of the Fed which struck with its classification of inflation being “transitory” for too long. He said, “Overtighten means that if the economy slips into a recession, you know — so be it.” He also said that in the short term, the economy is like a “sacrificial lamb” for the Fed.

While growth stocks have plummeted in 2022 and the S&P 500 is in the red, value stocks and stocks of companies that pay high dividends are outperforming. Value investing has outperformed growth over the last year, after almost a decade of underperformance.

Stephen Roach, who served as chair of Morgan Stanley Asia, is also bearish on the US economy and believes the country would need a “miracle” to fend off a recession.

US Job Market Has been Strong

One bright spot for the US economy has been the strong job market. The unemployment rate is at 3.5% which is the lowest since 1969. Roach meanwhile believes that the unemployment rate is bound to increase.

The July minutes also showed that Fed sees an increase in the unemployment rate in the back half of 2022 and sees it rising towards a more natural rate. Notably, while the overall job market has been healthy, many S&P 500 constituents, including Big Tech companies like Meta Platforms, Netflix, and Tesla have resorted to layoffs.

Meta Platforms is the second worst performing FAANG stock of 2022 and has lost over 50% this year. Some of the Wall Street analysts are however bullish on Meta Platforms stock and recommend buying the stock. Earlier this week, JMP reiterated the stock as overweight and called it a “compelling” opportunity. Bank of America also added the stock to its top US picks while removing Alphabet.

Amid slowing growth in its core social media and digital ad business, Meta Platforms has been looking at other ways to revive its growth. WhatsApp, which is owned by Meta Platforms, has partnered with Indian conglomerate Reliance to let consumers shop for groceries on the messaging app only.

Bank of America sees More Downside for the S&P 500

While many economists are getting worried about a recession, brokerages like Bank of America and Morgan Stanley, see a downside in the S&P 500. Bank of America’s technical strategist Stephen Suttmeier said that a head and shoulders pattern is forming in the index, which is a bearish indicator.

Wolfe Research’s Rob Ginsberg also expects the S&P 500 to break below 3,800. Notably, despite the rally in July and early August, the S&P 500 failed to move above its 200-day SMA (simple moving average). The Index has been trading below the 200-day SMA since early April.

After the recent slide, the S&P 500 is just slightly above the 50-day SMA also. The Index has been trading above the 50-day SMA since mid-July and a fall below the key technical level would be a bearish indicator.

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