Fund Managers and Investors Fear That Stagflation Will Shock Markets Within a Year

Customers browse food stalls inside Grand Central Market in downtown Los Angeles on March 11, 2022. Fears of stagflation in the U.S. economy are on the rise. Stagflation happens when the economy has slow growth, unemployment has risen to record heights, and prices are rising, or the country is in an inflationary stage.Patrick T. Fallon/AFP via Getty Images

Global investors and fund managers are increasingly concerned about the potential wave of stagflation expected to hit within the year, according to a recent Bank of America survey.

BoA’s latest fund manager survey, conducted on June 14, found that 83 percent of investors surveyed expect a major downturn in economic growth and rising inflation to sweep the markets within the next 12 months.

This is up from 77 percent in May, the highest recorded since June 2008.

The survey said that investor morale had not been that low since June 2008, before the Great Recession, according to BoA.

The collapse of investment bank Bear Stearns was only a few months away and rising oil prices were already spooking markets ahead of the collapse later that year.

It is feared that the stagflation will spark high unemployment, lower consumer spending, raise costs, and reduce corporate earnings, leading to a recession.

The bank’s survey took place a day before Wall Street was deeply shaken by a massive sell-off, when the June 10 Labor Department’s Consumer Price Index survey showed inflation increasing in May by 8.6 percent year over year.

The fund managers are now more likely to be concerned about soaring prices.

“Wall Street sentiment is dire,” said BoA’s Securities Investment strategists Michael Hartnett and Myung-Jee Jung.

“Inflation will remain high relative to history… so by far and away the most popular description of what the economic backdrop will be in the next 12 months is ’stagflation.'”

Of the 266 CIOs, asset allocators, and portfolio managers interviewed, over 220 of them expect stagflation to arrive by 2023.

Bank of America’s monthly survey of 266 global fund managers, running $843 billion in assets, found investors at the time still bullish on cash, healthcare, commodities, and energy, while bearish on short bonds, utilities, and equities.

The two most crowded trades were long contracts in oil and commodities, plus the U.S. dollar.

The S&P 500 entered a bear market at the start of the week’s trading, after losing nearly 10 percent four sessions in a row over concerns about the new hawkish Federal Reserve policy.

The survey found a net negative of money managers, 73 percent, expecting a stronger economy, the weakest reading since 1994, while global profit expectations fell to a negative 72 percent, the worse number since Sept. 2008.

“[There will be] no big low in stocks before big high in yields and inflation,” Hartnett and Jung said.

“The latter requires uber-hawkish Fed hikes in June and July.”

The Federal Reserve is again meeting on June 15 to discuss hiking interest rates, with most analysts expecting rates to rise by 75 basis points for the first time since 1994.

The central bank’s aggressive stance is worrying many investors, with 32 percent of fund managers seeing rising interest rates as the biggest threat facing markets right now.

The yield on the 10-year Treasury was at 3.475 at the end of the day, up over a third of a point since the CPI report.