Brace for a retest of June lows: Lisa Shalett

The U.S. central bank does not plan on slamming the breaks on raising rates until it’s sure that inflation is persistently and meaningfully coming down on all fronts, as per the FOMC meeting minutes released on Wednesday.

Shalett’s remarks on CNBC

That means, Lisa Shalett (Morgan Stanley) said on CNBC’s “Closing Bell: Overtime”, the downside risk remains on the cards even though the S&P 500 has retraced more than half of its year-to-date loss.

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We have this very traditional bear market rally focused on the narrative that peak inflation means peak Fed. Our view is that it’s profoundly premature. Historically, bear markets play out in at least two or three acts.

Federal Funds Rate is currently in the range of 2.25% to 2.50%, which the FOMC officials dubbed “neutral”.

Considering, however, that consumer prices are still lingering near a forty-year high, some recommended opting for a “restrictive” policy, indicating the central bank is not done raising rates yet.

Could there be a new low?

More alarming, however, is how steeply Shalett warns the market could plummet. Against the backdrop of a Fed that’s likely to remain hawkish, she added, the benchmark index could retest the June low in the coming months.

If inflation is conquered, so is pricing power and speed at which the economy is growing. Without pricing power and economic growth, there’s an awful number of these company’s earnings numbers that will come under pressure.

Nonetheless, Shalett expects “healthcare” to remain resilient in this environment.

She also likes energy (XLE), especially after the recent leg down in oil prices now has it trading at a 15% discount to its year-to-date high.