Original title: Heavyweight Warning! Bank of America: A “flash recession” may be imminent, what does this mean for US stocks?
Source: FX168
Top investment banks on Wall Street --Bank of America(Bank of America) strategists said that later this year, there are several indicators that indicate that the US will experience a “flash recession” (flash recession).
Recently, US economic growth data has been lower than expected as the Delta variant of COVID-19 has dampened global supply chains and demand. Bank of America strategists warned in a report released on Friday (August 20) that the outlook for the US economy is bleak recently and that a “flash recession” may occur this year.
The so-called “flash economic recession” refers to a brief and sudden decline in economic output. However, a standard recession means that economic activity has declined for at least two consecutive quarters.
Bank of America has identified three reasons why investors seem concerned about economic growth.
First, the US bond yield curve (that is, the difference between long-term and short-term bond yields) has declined. Since the end of the first quarter, the yield difference between 10-year and 2-year US Treasury bonds has declined from 1.59 percent to 1.02 percent. This means investors believe that even if inflation remains high, future economic demand will continue to weaken.
Second, commodity prices in response to economic demand have been falling, with crude oil and copper prices falling 16% and 13%, respectively, from their 2021 highs.
Third, small-cap stocks, whose earnings are more sensitive to changes in economic demand, have been impacted. The Russell 2000 Index fell nearly 8% from its all-time high set in mid-March.
Bank of America strategists believe that if economic demand actually weakens from now on, the manufacturing industry may be particularly affected.
The ISM Index, which measures manufacturing activity, shows that manufacturing activity increased nearly 50% year on year earlier this year, the highest growth rate since 2011. Michael Hartnett, chief investment strategist at Bank of America, wrote that since then, this growth rate has slowed to around 10%, and may turn negative by October. This decline is likely to be consistent with a decline or negative growth in overall economic output.
Bank of America data shows that any decline in manufacturing activity would be bad for the US stock market.
The year-on-year change in the ISM purchasing managers' index is closely related to the year-on-year change in the S&P 500 index. Bank of America strategists believe that if manufacturing activity shrinks, the S&P 500 index will fall sharply. Hartnett wrote that Bank of America's opinion is that the stock market will experience negative returns in the second half of this year.
Investors are mainly concerned about the threat of stagflation, that is, weak economic growth partnersQualcommbloating.
This year, as states and countries reopened, trillions of dollars in fiscal stimulus boosted demand and inflation increased. Now, supply chain constraints are worsening as the Delta variant forces global ports and factories to close, leading to supply shortages and ultimately rising costs.
“Inflation is now triggering stagflation,” Hartnett notes. Investors need to continue watching the development trajectory of the Delta variant.