Stocks Could Plunge Another 15% After Fed-Spurred Selloff—Will The Economy Fall Into Recession?

Topline

Fresh off the stock market’s worst quarter since the Covid-induced downturn two years ago, many experts still aren’t convinced a recession is in the cards this year, but some are warning the risks could keep rising through next year as the Federal Reserve eases stimulus measures—signaling more bad news for stocks.

Federal Reserve Board Chairman Jerome Powell testifies during a committee hearing on Capitol Hill.

Getty Images

Key Facts

In a Monday note to clients, Morgan Stanley analyst Michael Wilson warned that mounting evidence showing economic growth is slowing more quickly than feared sparked last week’s “especially vicious” stock sell-off and likely isn’t over, making the S&P 500, which has already plummeted 14% this year, likely to fall another 8% in the coming months.

“If there’s a true growth scare with recession probabilities rising materially,” the S&P could tank as much as 16%, Wilson calculates, pointing out the plunge to 3,460 points would line up with the index’s pre-pandemic highs—”where a lot of stocks have already ventured.”

Though Wilson reckons lingering high prices could deter consumer spending in coming months and push economic growth deeper into negative territory, other experts aren’t calling for a recession just yet—even though they’re acknowledging the risks are rising.

“Recession risks are low now, but elevated in 2023,” Bank of America economist Ethan Harris said in a Friday note, positing that ongoing inflation could force the Fed to hike interest rates “until it hurts,” thereby eating at corporate profits and perhaps spurring a slew of layoffs.

Goldman Sachs economist Jan Hatzius is more optimistic, telling clients on Monday that “a recession is not inevitable” and placing the odds of one at 15% over the next year and 35% over the next two years.

Hatzius acknowledges today’s overheated labor market and decades-high inflation rate are clear headwinds, but says Covid stimulus helped put small businesses and firms with a lot of debt—which are among the most vulnerable to high interest rates—in historically strong financial positions that should help stomach the risks stemming from changes to Fed policy.

Key Background

The reopening economy, fiscal stimulus and historically low interest rates helped fuel one of the strongest bull markets ever during the pandemic, but stocks have struggled this year as the Fed raises rates and unwinds economic support to ease decades-high inflation. Uncertainty has come to a head in recent weeks, with the tech-heavy Nasdaq posting its worst month since 2008 in April, and data showing the U.S. economy shrank 1.4% last quarter despite expectations calling for 1% growth.

Crucial Quote

“The Fed has been very explicit and relatively unanimous in preparing markets for what’s coming on the tightening front, so investors aren’t necessarily concerned about it having to do more than what is already assumed, but instead that it will be impossible for the economy to avoid a recession in light of such a swift withdrawal of stimulus,” explains market analyst Adam Crisafulli of Vital Knowledge Media.

What To Watch For

The Fed concludes its next monetary policy meeting on Wednesday, when officials are expected to announce how aggressively they’ll act to raise interest rates. “For the first time in 22 years, the Fed is poised to raise interest rates by more than a one-quarter percentage point increment, and at consecutive meetings for the first time in 16 years,” Bankrate Chief Financial Analyst Greg McBride said in emailed comments Monday. After a 25-basis-point-hike in March, officials are expected to raise rates by 50 basis points this week, and as much as 75 basis points in June.

Topline

Key Facts

Key Background

Crucial Quote

What To Watch For

Further Reading