The stock market is poised to hit new lows later this year after July’s hot jobs report, Bank of America said in a Friday note.
Indeed, inflation should persist and the Fed will be forced to continue to tighten financial conditions.
“I still think endgame SPX is [below] 3,600,” BofA said, representing a downside potential of 13%.
According Bank of America Michael Hartnet.
In a Friday note, Hartnett said a strong July jobs report of more than 400,000 new jobs would drive the stock market lower over the next four weeks. The July jobs report finally recorded a gain of 528,000 new jobs, more than double economists’ estimates as the economy proves resilient.
The S&P500 immediately fell 1% after the release of the July jobs report before recovering some of its losses. Hartnett expects the S&P 500 to eventually trade below 3,600, which represents a potential decline of 13% from current levels.
The strength of the jobs report means that high inflation is likely to last longer than most think, which means the Federal Reserve will be forced to continue its policy of aggressive interest rate hikes in the next meeting of the Federal Open Market Committee at the end of September.
Until then, the Fed will have two CPI reports and the August jobs report to better assess whether it should raise interest rates another 75 basis points to fight inflation.
Recall that the stock market’s recent 14% rally was supercharged in July by Fed Chairman Jerome Powell’s comment that the Fed will not predict future rate hike plans going forward and will instead focus solely on incoming data to make its decision, leaving the door open for a potential pivot.
If economic data continues to be strong and inflation persists, expect further interest rate hikes that will eventually drive the stock market lower, according to Hartnett.
“[It’s] very hard on inflation [of] 2% to 3% [over the] next 12 months without [a] great recession,” Hartnett said.
But a recession seems less likely given that the US economy has created more than 3 million new jobs so far this year, helping to push the unemployment rate to just 3.5%. Meanwhile, unemployment insurance claims remain near all-time lows. This strength in the labor market is not typical of an economy on the verge of recession.
Still, high inflation and tepid economic growth could open the door to stagflation, which Hartnett predicts will return in the fourth quarter of the year and present a big near-term opportunity for investors.
“Painful comeback for many. We’re saying melt S&P 500 above 4,200, sell S&P 500 above 4,342,” Hartnett said.
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