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3 charts show the market is headed for trouble

3 charts show the market is headed for trouble


Michael Hartnett, Bank of America's chief global strategist, believes a no-landing scenario is the most likely outcome for the U.S. economy in the coming months. That means the job market would remain strong, but inflation would also remain above the Federal Reserve's long-term goal of 2%.

While this is acceptable for now, Hartnett warns that it is a path that will eventually lead to problems for the economy and stocks. The longer inflation remains high, the longer the Fed will have to maintain restrictive policy or even tighten it further, putting the economy at risk of recession as businesses and consumers slow their borrowing and spending.

“We say that the increased risks of no landing mean the increased risks of a hard landing,” Hartnett said in an April 11 memo. “Monetary tightening is resuming (markets are now pricing in a 15% probability of a Fed hike) and contagion risks come from REITs, regional banks and small caps.”

In many ways, the U.S. economy appears strong. The unemployment rate is at a historic low of 3.8% and monthly job growth is stable. Consumer spending, which accounts for about two-thirds of the U.S. economy, also remains robust. Household balance sheets are also strong, with property values ​​at all-time highs and stocks hovering just above record highs.

But some cracks are starting to appear. Delinquencies on credit cards and auto loans are on the rise, as are layoff announcements. As Hartnett noted, small business optimism is low, with hiring plans at an eight-year low among them. This is concerning because small businesses make up two-thirds of the U.S. labor market.

hiring plans for small businesses

Bank of America

Another sign that the economy could be headed for trouble is the sudden drop in high-yield bond prices in recent months. High-yield bonds carry a higher risk of default, so investors demand higher returns in a fragile economic environment. Bond yields rise when their prices fall.

The iShares iBoxx $High Yield Corporate Bond ETF (HYG) just hit its 200-day moving average, which Hartnett called “worrying.” The fund's price fell below its 200-day moving average in 2020 and 2022, when the economy slowed and stocks underperformed.


Bank of America

So this could be a sign that stocks are heading into a downtrend as the S&P 500 sits near its all-time highs.

Hartnett said there are also other signs that stocks could be in bubble territory. The first is that the tech-heavy Nasdaq index rises along with 10-year Treasury yields, something that historically only happens during bubble or recovery periods.

yields and nasdaq

Bank of America

Are we headed for a hard landing?

The market consensus has shifted from a hard landing in 2022 to a soft landing in 2023 and 2024. But as Hartnett believes, the outlook could start to shift more toward a bearish scenario in the coming months, the Fed likely leaving its rates higher for longer.

Last December, investors expected the central bank to make its first rate cut in March. But as the jobs data has become very hot and inflation has remained above 3%, the Fed is now expected to cut rates in July. Some even exclude reductions for the whole of 2024.

“We are firmly in the camp of no rate cuts in 2024,” Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, said in a note Thursday. “While unlikely, there is actually a strong case for the Fed to raise interest rates in 2024 given high inflation, low unemployment, high stock prices, surging bitcoin and the re-emergence of IPOs.”

Geopolitical tensions are also high at the moment, as conflicts continue in Ukraine and the Middle East. This has caused oil prices to rise since December, threatening to trigger a new surge in global inflation.

Despite geopolitical and monetary risks in the post-pandemic period, the US economy has so far managed to avoid a recession, proving pessimistic forecasters wrong.

This may continue. But as Hartnett argues, the longer a no-landing scenario in which inflation remains high continues, the greater the risks of recession and bear market.




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