So far 2022 has been a year where just about everyone on Wall Street got it wrong. As did the Fed and a cadre of global central banks.
Back in December, strategists at the world’s top investment firms like JPMorgan Chase & Co. predicted the S&P 500 would gain 5% in 2022. Economists saw the U.S. 10-year Treasury yield hitting 2% on average by the year’s end. And even Goldman Sachs Group Inc. lent credibility to the claims Bitcoin was on track to hit $100,000.
Yet six months later, an unprecedented confluence of shocks has ended one the most powerful equity bull markets and sent safe-haven government bonds and other assets spiraling. The S&P 500 is down 23%, 10-year rates stand at 3.23% and Bitcoin has shed more than half its value.
The market has quickly turned from from “buy everything” to “sell everything,” with the multi-year “there is no alternative” (TINA) phenomena in equities now gone. Unforeseen events including the Russia-Ukraine war have contributed to the highest consumer prices in 40 years. And as a result, ultra-low interest rates and monetary stimulus -- essentially the foundation of the post-pandemic rally -- have evaporated as the Fed and its counterparts have sought to quell inflation.
“This is absolutely the end of TINA for the foreseeable future” said James Athey, investment director at abrdn in London. “With 8% inflation not much is attractive on a real basis.”
Even Jerome Powell, the central bank chairman, didn’t see the turbulence that was coming from inflation. He expected price gains to decline to levels closer to the Fed’s longer-run goal of 2% by the end of 2022. But now bond markets are flashing recession signals as the Fed’s aggressive rate hikes pose a risk to the economy’s growth.
“This time last year the Fed were themselves still expecting [rates] to be floored near zero at this point,” said Deutsche Bank strategist Jim Reid. In less than half a year, that needle now points to 3.5% by 2022’s end.
Bear With Me
Even with the sharp declines, however, market gurus are keeping faith stocks will make a recovery by the end of the year.
Oppenheimer’s John Stoltzfus still sees the S&P 500 ending 2022 at 5,330 points, requiring a 45% rally in the next six months. A handful of others, including JPMorgan and Credit Suisse Group AG, have targets that require the index to rally at least 30% to be met. Wall Street strategists, on average, see the S&P 500 gaining 22% from Friday’s level in the latest Bloomberg survey.
To be sure, it’s anyone’s guess on when Russia’s war in Ukraine will end or the supply chain bottle necks due to China’s stringent Covid policies will ease, lifting price pressures in addition to the Fed’s policy tightening.
But for Max Kettner, chief multi-asset strategist at HSBC Global Research, equities haven’t fully priced in a recession relative to other asset classes. “All in all, this means there is further weakness for risk assets in store over the summer months.”