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Stock market will crash in stagflation scenario, Bank of America warns

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the S&P500 was wiped out in a widespread sell-off this month, and the benchmark is likely to drop even lower if the economy experiences a return to 1970s-style stagflation, Bank of America analysts say.

In a recent analyst note, Bank of America strategist Savita Subramanian warned that a “worst case” scenario of stagflation – the rare combination of economic stagnation and high inflation – could see the index benchmark S&P 500 drop to 3,200, down about 17% from the current one. values. This would mark an astonishing 33% drop since the start of the year.

S&P 500 FALLS INTO BEAR MARKET AND JOINS NASDAQ

The S&P has already fallen just over 20% this year, officially entering a bear market on Friday afternoon for the first time since March 2020, at the start of the COVID-19 pandemic. High inflation, rising interest rates and the risk of a recession have rattled investors in recent weeks.

The stock market in freefall

Traders work on the floor of the New York Stock Exchange (NYSE) on May 18, 2022 in New York City. ((Photo by Spencer Platt/Getty Images)/Getty Images)

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$11354.617127

-33.88 (-0.30%)

So far this year, the benchmark has fallen for seven straight weeks, its worst period since the bursting of the dot-com bubble in 2001. Subramanian warned that investors should be wary as “recession risks take the on it,” and noted that market conditions are reminiscent of the dotcom bubble.

WHAT IS STAGFLATION? WHY ECONOMISTS WORRY ABOUT A 1970S-TYPE DISASTER

“In our report on the year 2022, one of the reasons we were cautious was the range of similarities with 1999/2000, one of which was the acceptance of the unthinkable,” she said. writing.

There are growing fears on Wall Street that the Fed could inadvertently trigger a recession with its war on inflation, which soared 8.3% in April, near a 40-year high. Bank of America, Fannie Mae and Deutsche Bank are other companies predicting a slowdown over the next two years. Subramanian estimated the chances of a recession at around 40%.

Economic growth in the United States is already slowing. The Bureau of Labor Statistics reported earlier this month that gross domestic product unexpectedly shrank in the first quarter of the year, marking the worst performance since spring 2020, when the economy was still in the grip of the COVID-induced recession.

Food price inflation

A man shops at a Safeway grocery store in Annapolis, Maryland on May 16, 2022, as Americans brace for summer sticker shock as inflation continues to soar. ((Photo by JIM WATSON/AFP via Getty Images) / Getty Images)

Fed policymakers already raised the benchmark interest rate by 50 basis points earlier this month for the first time in two decades and signaled that further rate hikes of a similar size are on the table. in upcoming meetings as they race to catch up with inflation. President Jerome Powell recently pledged that officials would “keep pushing” until inflation nears the Fed’s 2% target.

Still, he acknowledged there might be some “pain associated” with lower inflation and lower demand, but pushed back against the idea of ​​a looming recession, identifying the labor market and strong consumer spending as bright spots in the economy. Still, he warned that a soft landing is not assured.

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“It will be a difficult task, and it has been made more difficult over the past two months due to world events,” Powell said Wednesday during a Wall Street Journal live event, referring to the war in Ukraine. and COVID lockdowns in China.

But he added that “there are a number of plausible pathways to having a soft or soft landing. Our job is not to handicap the odds, it’s to try to achieve that.”

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