Deutsche Bank says 20% drop and recession looming

  • Stocks sold off this week amid fears of tighter monetary policy than investors expected.
  • Deutsche Bank on Tuesday predicted a recession and a bear market ahead.
  • It is the first major Wall Street firm to make such a call. This is what other banks say.

The outlook for monetary policy, and how Federal ReserveThe approach to will impact markets is evolving very rapidly.

As 2022 began, most investors and the Fed itself were anticipating three 25 basis point rate hikes throughout the year. That outlook quickly changed as inflation continued to rise and the central bank changed its stance on rising prices from saying it would be a temporary phenomenon to making it its top priority.

banks like it JPMorgan Y Bank of America in late January and early February they began to increase their rate hike forecasts to six or seven, which quickly became consensus opinion on Wall Street.

Now, the predictions are going up even higher. german bank is part of the crowd that believes the Fed will raise rates even higher than that, as investors anticipate 50 basis point hikes at upcoming Federal Open Market Committee meetings.

In a note to clients on Tuesday, Matthew Luzzetti, the bank’s chief US economist, said he believes the Fed will raise the fed funds rate to around 2.6% this year, meaning the committee will institute the equivalent of at least 10 increases of 25 base points. points.

But the result of this radical change will not end well, he said.

“We no longer see the Fed achieving a soft landing,” Luzzetti said in a note to clients on Tuesday. The term “soft landing” refers to the Fed raising rates enough to control inflation without triggering a


recession

.

“Instead, we anticipate that a more aggressive tightening of monetary policy will push the economy into a recession,” Luzzetti added.

Along with this call, Deutsche Bank’s equity strategists binky chadha and Parag Thatte said in a note Tuesday that they expect the S&P 500 to feel the pinch of an economic downturn.

“In 2023, we expect equity markets to hold up well through the summer before the US slips into recession and equities correct by a typical 20% at the start, before bottoming out at the midway point and recovering previous levels”, Chadha and Thatte. saying. However, the two strategists remain short-term bullish and still have a 2022 price target of 5,250 on the S&P 500. The index closed near 4,488 on Friday.

Deutsche Bank is the first major Wall Street firm to call for a recession and


bear market

in stocks, and Luzzetti believes this view will eventually become a consensus. Meanwhile, here’s what other Wall Street institutions are saying about the state of the economy and the stock market.

Morgan Stanley

In the short term, Morgan Stanley is bearish on stocks. His Top US Equity Strategist Mike Wilson he said in a note Monday that he believes the rally stocks saw in late March is over. His forecast proved correct this week, with the S&P 500 falling about 1% to end a three-week winning streak.

“The bear market the rally is over,” Wilson said in the note. “While 1Q was tough for most stocks, the second half of March was exceptionally strong. The rally was predictable from a technical perspective, but it was always a bear market rally in our view, and now we think it’s over.”

Wilson is predominantly bearish as he sees economic growth slowing amid the Fed’s tightening regime, hurting earnings. This is despite impressive job growth in February in March: a stronger economy now gives the Fed more room to tighten policy more harshly.

Wilson also said rising costs for both consumers and businesses will weigh on economic growth, as will the lack of fiscal stimulus compared to 2021.

He said the ISM manufacturing survey already shows an economic slowdown with low orders and inventory. The S&P 500 typically suffers when manufacturing slows, he said.

s&p 500 and ism growth


Morgan Stanley


Wilson has a 2022 price target of 4,400 for the S&P 500.

Goldman Sachs

Goldman economists say the economy will experience a big growth slowdown in 2022. They forecast GDP growth of 1.9% year over year, down from 5.7% last year. While they see a slowdown in growth, they said in March that they see a 35% chance of a recession ahead.

Chief US Equity Strategist at Goldman Sachs David Costin he said in a note Monday that he sees S&P 500 earnings per share falling below consensus ($227) this year to $221. The relatively bearish call is due to slowing economic growth due to more aggressive monetary policy and higher commodity prices.

Still, Kostin’s 2022 price target for the S&P 500 is 4,700.

UBS

Mark Haefele, the CIO of UBS Wealth Managementsaid this week that he sees the economy as healthy for three reasons: A strong labor market, strong family savings, and positive business sentiment.

The unemployment rate stands at 3.6%, close to its pre-pandemic low; household savings remain relatively high and are well protected against things like rising mortgage rates (at least for current homeowners); And despite inflation, consumer demand remains strong.

However, if any of these things erode, the economy could be in trouble, they said.

“While risks have increased and we advise investors to add hedges to their portfolios, our base case remains that the US economy can avoid a recession,” Haefele said in the note.

The bank’s chief US equity strategist keith parker has a 2022 price target of 4,850 on the S&P 500.

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