Key Points:
- Peter Berezin of BCA Research forecasts a significant recession.
- S&P 500 target reduced to 3,750, predicting a 30% drop.
- Expected widespread economic impact, including Europe and China.
Details: Peter Berezin, Chief Global Strategist at BCA Research, has revised his target for the S&P 500 to 3,750, down from J.P. Morgan Global Research’s year-end target of 4,200. This adjustment is based on Berezin’s expectation that the U.S. will enter a sudden and unexpected recession either later this year or in early 2025.
Economic Outlook: Berezin predicts that if this recession materializes, the S&P 500 could decline by over 30% from current levels. He expects the economic pain to be widespread, affecting growth in Europe, which is just beginning to recover, and China, which continues to grapple with the fallout from a real-estate bubble collapse. Consequently, global growth would weaken, adversely impacting global stocks.
Labor Market and Consumer Spending: Berezin’s forecast hinges on a rapid slowdown in the labor market, which would exert significant pressure on consumer spending, a critical driver of the economy. Indicators such as a substantial drop in job openings and a slower pace of wage growth suggest a weakening labor market. Additionally, recent data points to slowing consumer spending, including the latest personal consumption expenditures price index.
Bank Balances and Lending Standards: Lower-income Americans appear to have exhausted their pandemic-era savings, as evidenced by rising delinquency rates for credit cards and auto loans. This trend could prompt banks to tighten lending standards, further straining consumers. As consumer spending slows, businesses may also reduce their capital expenditures, despite positive trends in artificial intelligence, the CHIPS Act, and reshoring.
Federal Reserve and Fiscal Policy: Berezin does not expect the Federal Reserve to intervene immediately once the recession begins, due to concerns about reigniting inflation. Additionally, with the budget deficit projected to grow to 7% of GDP in 2024, fiscal policy is unlikely to offer much support. Any attempts to increase unfunded spending would likely face resistance from the bond market.
Investment Recommendations: BCA Research advises clients to reduce equity holdings and increase allocations to bonds and cash. For tactical trades, Berezin suggests shorting bitcoin and betting on falling bond yields to lower the U.S. dollar against the Japanese yen. He anticipates the yield on the 10-year Treasury note could fall to 3% and the fed-funds target rate could be cut to 2% if his recession scenario unfolds.
Comparative Outlook: J.P. Morgan’s top strategist, Marko Kolanovic, maintains a target for the S&P 500 predicting a more than 23% drop by year-end. J.P. Morgan’s midyear outlook expects U.S. growth to moderate in the second half of 2024, with megacap names facing high investor expectations. As valuations for these names appear stretched, a reversal in the artificial intelligence trade could lead to a significant market pullback.
Market Performance: On Friday afternoon, U.S. stocks were trending downward, with the S&P 500 and Nasdaq Composite losing over 0.1%, and the Dow Jones Industrial Average down by 0.3%.
Tags: #Stocks #USEconomy #Recession #SP500 #MarketOutlook
