Wall Street’s confidence in the stock market falls to its lowest level in 5 years

Wall Street is feeling more pessimistic about the state of the stock market than it has in years as investors brace for a recession amid scorching inflation, according to Bank of America strategists.

In a new analyst note, economists said the bank’s sell indicator – which tracks the average allocation to equities recommended by U.S. sell-side strategists – plunged for the seventh consecutive month to the lowest level. low in more than five years.

“We found that the consensus allocation of Wall Street stocks has always been a reliable contrarian indicator,” the note said. “Although the SSI does not capture every rally or decline in the stock market, the indicator has historically had some predictive ability with respect to subsequent 12-month S&P 500 total returns.”

The metric has held steady at “neutral” levels throughout 2022, but is moving ever closer to the “buy” threshold after recent declines. Because the indicator is a contrarian indicator, it suggests that investors are becoming increasingly bearish about the state of the US economy and the stock market.

US ECONOMY ENTERS TECHNICAL RECESSION AFTER SECOND QUARTER GROWTH DROPS 0.9%

The analyst’s note said the gauge’s steady decline – which is the longest consecutive decline since the 2008 financial crisis – coincides with economists’ expectations of a mild second-half recession.

At the same time, the equity risk premium has also increased, indicating that markets have priced in an 80% chance of a mild slowdown and a 30% chance of a “full-fledged” recession.

The analyst’s note comes just days after the Commerce Department announced that GDP, the broadest measure of goods and services produced in the economy, fell 0.9% on an annualized basis over the the three-month period from April to June. Economic output already fallen in the first three months of the year, with GDP falling by 1.6%.

Recessions are technically defined by two consecutive quarters of negative economic growth and are characterized by high unemployment, low or negative GDP growth, declining incomes and slowing retail sales, according to the National Bureau of Economic Research (NBER ), which tracks slowdowns.

IS THE UNITED STATES ENTERING A RECESSION?

The US Federal Reserve Building in Washington on April 29, 2020. (Xinhua/Liu Jie via Getty Images/Getty Images)

With consecutive declines in growth, the economy is meeting the technical criteria of a recession, which requires a “significant decline in economic activity that spreads throughout the economy and lasts for more than a few months.” Still, the NBER – the semi-official arbitrator – may not confirm it immediately as they usually wait up to a year to call it.

The NBER also pointed out that it relies on more data than GDP to determine if there is a recession, such as unemployment and consumer spending, which remained strong in the first six months of the crisis. year. It also takes into account the magnitude of any decline in economic activity.

There is a growing consensus on Wall Street that the Federal Reserve will trigger a recession as it fights inflation with a series of aggressive interest rate hikes. Policymakers approved the second consecutive 75 basis point rate hike last week and indicated that another large rate hike is on the table in September, depending on upcoming economic data.

Fed Chairman Jerome Powell told reporters that fighting inflation remained the central bank’s No. not that the United States is currently in a recession.

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“We believe there is a need to slow growth,” he told reporters last week. “We actually think we need a period of growth below potential in order to create some looseness so that supply can catch up.”