Bank of America Strategists Expect Economic ‘Hard Landing’ to Pummel Markets

Traders work on the floor of the New York Stock Exchange on Jan. 3, 2017. Spencer Platt/Getty Images

Bank of America strategists are expecting an economic “hard landing” to pummel the markets at the end of the year, due to a resilient U.S. economy.

Economists are beginning to fear that a delayed recession in the second half of 2023 will be harsh on stocks, since the current state of the American economy is keeping interest rates higher for longer

Bloomberg reported, that BoA strategists, led by Michael Hartnett, in a Feb. 16 note, predicted a “no landing” scenario for the first half of the year, as economic growth continues to remain strong and the Federal Reserve maintains its hawkish rate policy,

Hartnett said that the period of growth will probably be followed by a “hard landing” in the latter part of the year.

Meanwhile. a BofA global fund manager survey from Feb. 14 showed most investors expect the current stock rally to fizzle out. About 66 percent of respondents said stocks are beginning to see a bear market rally and expect them to return to new lows.

Recent economic indicators show that the Fed’s plan to bring down inflation is “very much unaccomplished,” said Hartnett.

Analysts are increasingly concerned recent by hawkish commentary from central bank policymakers who favor returning to bigger interest-rate hikes in the future.

Fed Policymakers May Accelerate Interest-Rate Hikes

They believe that the Fed should raise rates by 50 basis points to rapidly hit its peak interest rate of 5.1 percent this year to lock in disinflation.

Loretta Mester, president of the Federal Bank of Cleveland, and James Bullard, president of the Federal Reserve Bank of St. Louis, called for an acceleration in the pace of rate increases earlier this month.

The hawkish central bank officials have pointed to recent U.S. producer prices and inflation reports that point to the need for additional upward pressure by the Fed.

Consumer prices rose 0.5 percent in January, the most in three months, while the annual inflation rate rose to an unexpected 6.4 percent.

Inflation has so far come down from last year’s 9.1 percent peak, which was the highest in four decades.

Fed officials said they are closely watching the cost of services, excluding housing and energy, and will take that into account before making a decision at the next policy meeting of the Federal Open Market Committee in March.

“Continued policy-rate increases can help lock in a disinflationary trend during 2023, even with ongoing growth and strong labor markets, by keeping inflation expectations low,” said Bullard.

He also predicts that economic growth will moderate this year and that unemployment rates will to return normal long term levels.

BoA Strategist Predicts S&P 500 to Drop in March

However, Hartnett expects the S&P 500 Index to fall to 3,800 points by Mar. 8, after stocks failed to surpass the ceiling of 4,200 points on Feb. 16.

Morgan Stanley’s Michael Wilson agreed with Hartnett’s outlook, predicting that stocks were set for a sell-off, after investors prematurely priced in a pause in Fed rate hikes, reported Bloomberg.

Wilson said that he expects the bear market to bottom to out in the spring, as Fed hikes during an earnings recession would spur further declines.

BoA also noted earlier this week that investors continued to drop U.S. equities for European stocks, with outflows totaling $2.2 billion, according to EPFR Global data.

Europe saw inflows of $1.5 billion, while emerging market stocks drew in $100 million.

Harnett wrote that U.S bond yields saw inflows of $5.5 billion, while BofA’s private clients poured their third-largest amount on record into bonds and Treasurys saw their best start to a year since 2004.