Wall Street’s confidence about the state of the stock market has fallen to the lowest level in five years, said the Bank of America strategists in an analyst note published on Wednesday.
The strategists based their claim on the bank’s Sell Side Indicator. For the last seven months, the indicator kept falling until it reached the lowest level in more than five years this month. The SSI measures the average stock allocation that American sell-side strategists advise investors to make.
According to the note, the consensus equity allocation has for many years been a dependable indicator. The decline, which is the longest since the 2008 financial crisis. is in line with the general expectations among economists for a moderate recession in the last half of 2022. Moreover, the Equity Risk Premium’s recent rise also indicates a 30 percent chance of a recession.
A possible recession
According to the National Bureau of Economic Research (NBER), which monitors downturns, recessions are formally defined as two consecutive quarters of negative economic growth. They are marked by high unemployment, low or negative GDP growth, declining income, and slowing retail sales.
The Commerce Department released a report a few days ago that the U.S. GDP shrank by 0.9 percent from April to June. GDP measures the number of goods and services produced by a country. Earlier this year the GDP fell 1.6 percent.
With consecutive negative growth, technically the economy fulfills the definition of a recession. However, the NBER is unlikely to confirm the situation any time soon. It usually takes a year for the institution to do so.
Moreover, the fact that consumer spending remained high in the first semester of 2022 contributes to NBER’s decision to delay announcing a recession.
A response to inflation
In its attempts to rein in inflation, the Federal Reserve has made a series of interest raise hikes. Last week, it approved 75-basis point rate raise. The raise follows the previous three raises. All raises add to a total of 2.25 percentage points, an answer to inflation’s 9.1 percent annual rate, its highest since the 1980s.
On separate occasions this week, several Fed executives have signaled their willingness to continue doing so if inflation remains uncontrollable. St. Louis Fed President James Bullard, for example, told CNBC on Wednesday that he did not believe the U.S. is in a recession.
Their position is supported by Jerome Powell, the Fed Chairman. He has stated that curbing inflation is still the central bank’s top priority. He also said that he did not believe the U.S. was in a recession. Powell went so far as to suggest another large raise in September if the Fed’s effort does not succeed in driving inflation down. As he put it, it was necessary to “have growth slow down”.
These aggressive hikes contribute to Wall Street’s turn to pessimism since they are liable to drive the economy into a recession.
Next move
The U.S. Bureau of Labor Statistics (BLS) will publish its latest data on employment on Friday. Earlier this week, its data revealed a slowly closing gap between job openings and available workers.
