S&P 500 may plunge 20% in coming months as recession hits, BofA warns

The inventory market may face one other tumultuous yr in 2023, with the S&P 500 experiencing a dramatic correction if the U.S. tumbles right into a recession, in line with Financial institution of America strategists.

In a Monday analyst observe, the strategists warned the benchmark index may fall as little as 3,240 factors, or about 20%, from present ranges if the U.S. enters a recession in coming months.

“Historical past means that if the U.S. financial system experiences a recession, the SPX bottoms out throughout the recession and never earlier than,” the observe mentioned. “Solely the March 1945-October 1945 recession noticed the SPX rally forward of and all through the recession.”

The S&P has already plummeted about 16% this yr as buyers weigh considerations about stubbornly excessive inflation, steeper rate of interest hikes and the chance of an financial downturn subsequent yr. However the Financial institution of America strategists warned on Monday there might be additional declines forward for the market.

“Common and median SPX declines related to recessions are 32.5% and 27.1%, respectively, and lasted 13.1 and 14.9 months, respectively,” they wrote. “This equates to SPX 3,500 to SPX 3,240 in February to April 2023, which aligns with the SPX peak to trough declines related to the cross of the 12-month MA under the 24-month MA on the SPX.”

Regardless of a slight deceleration in client costs final month – inflation rose 7.7% yearly, the slowest tempo since January – there may be nonetheless a rising consensus on Wall Road that the Fed will set off a recession because it raises rates of interest on the quickest tempo in many years.

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The Federal Reserve in November accredited a fourth consecutive 75-basis-point charge hike, lifting the federal funds charge to a variety of three.75% to 4% – effectively into restrictive ranges – and confirmed no indicators of pausing charge will increase.

Though policymakers have indicated a desire for a smaller, 50-basis-point charge hike at their assembly subsequent week, they’ve additionally signaled an urge for food for the next peak rate of interest that would additional limit financial exercise.

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“The time for moderating the tempo of charge will increase might come as quickly because the December assembly,” Fed Chairman Jerome Powell mentioned throughout a speech in Washington final week. “Given our progress in tightening coverage, the timing of that moderation is much much less important than the questions of how a lot additional we might want to increase charges to regulate inflation, and the size of time it is going to be obligatory to carry coverage at a restrictive degree.”