Most Wall Street Experts Now Predict Stagflation—Here’s What That Means For Investors And The U.S. Economy

Topline

Professional investors are growing increasingly gloomy about the future, with the majority now predicting that stocks will fall into a bear market this year and the U.S. economy will be plagued by stagflation meaning high inflation and slow economic growth, according to Bank of America’s latest Global Fund Manager Survey.

Key Facts

Investor sentiment is growing increasingly bearish, with expectations for global economic growth plunging to their lowest level since the collapse of Lehman Brothers during the Great Financial Crisis of 2008, according to Bank of America’s monthly survey of roughly 300 respondents managing a collective $1 trillion in assets.

Concerns over inflation, which had appeared to be abating earlier this year, came roaring back in March, with over 60% of investors predicting the U.S. economy will take a hit from stagflation—more than double the amount who said so last month.

With surging inflation and geopolitical uncertainty from Russia’s invasion of Ukraine dragging the U.S. stock market into correction territory this year, fund managers are now holding more cash, at a rate not seen since April 2020, when pandemic lockdowns plunged the economy into a short recession.

The majority of professional investors see rising recession risks ahead once more, with 60% predicting a bear market in 2022 and over 50% expecting that high inflation will be “permanent.”

Markets historically don’t do well in periods of stagflation: When the U.S. economy faced stagflation towards the end of Richard Nixon’s presidency, the S&P 500 fell roughly 17% and 30% in 1973 and 1974, respectively.

Despite the current uncertainty in markets, “investors should remind themselves not to become their portfolio’s worst enemy and let emotions rule their decision making,” says Sam Stovall, chief investment strategist at CFRA, who argues that there are still plenty of opportunities in the form of high quality and high dividend stocks.

Crucial Quote:

“It’s hard to ignore what we see and hear other people forecasting—there’s an old saying, ‘don’t be wrong for too long,’” says Stovall. While he predicts stocks could slip into a “baby bear market” this year, “that said, I don’t see us heading into a 1973/1974 scenario where we had a more than two-year bear market and the S&P 500 lost almost 50% of its value.”

What To Watch For:

The Federal Reserve is expected to raise interest rates, by 0.25%, for the first time since 2018 after the central bank concludes its two-day policy meeting on Wednesday. While a lot of the survey indicators point to a “recessionary” outlook, investors still expect on average 4.4 interest rate hikes this year, which is up slightly from last month, according to Bank of America’s survey.

Key Background:

The stock market has had a rough start to 2022, with investors not only whipsawed by the Federal Reserve’s war on inflation but also the ongoing conflict between Russia and Ukraine, which has led to a surge in energy prices. The S&P 500 now sits in correction territory—more than 10% below its record high earlier this year, while the tech-heavy Nasdaq Composite is in a bear market, 20% below its highs last November.

Contra:

“The risk of a recession over the next 18 months is higher than before Russia’s invasion, but the U.S. economy is still likely to see continued growth, though at a slower pace than seemed possible at the start of the year,” according to a recent note from Bill Adams, chief economist for Comerica Bank.