Market Extra: Stagflation, reflation, soft landing or a slump — what Wall Street expects in the second half of 2022

by | Jun 24, 2022 | Stock Market

As the first half of 2022 draws to a close, Wall Street investment banks and their legions of strategists have been busy telling clients what they should expect in the second half of what has been an extraordinary year for markets as U.S. stocks head for their worst start in decades. Investment banks like JP Morgan Chase & Co.
JPM,
+2.98%,
Barclays
BCS,
+3.66%,
UBS Group
UBS,
+6.59%,
Citigroup Inc.
C,
+3.26%
and others have over the past week or two released their outlooks on what investors should expect in the second half of the year. MarketWatch has some of the highlights — with one theme uniting them: uncertainty.

That’s largely because markets will hinge on Federal Reserve policy. With officials signaling an intention to remain data-dependent, the direction of monetary policy inevitably will depend on how inflation develops over the coming months. Another thing many banks agreed on was that a recession in the U.S. in the second half of the year looked unlikely — or at the very least, not in their base case. Here are other highlights. Stagflation, reflation, soft landing or slump? The team at UBS divided their outlook into four scenarios: “stagflation,” “reflation,” “soft landing” or “slump,” and outlined what the reaction in stocks and bonds could look like in each case. Their best case scenario for stocks would be either a “soft landing” or “reflation,” but in each case, investors would see inflation pressures moderate while the U.S. economy avoids a recession. Under the “stagflation” scenario, stubborn inflation and tepid growth would drive both stocks and bonds lower, essentially marking a continuation of the trading patterns seen so far this year, where both bonds and stocks have taken a beating. Their worst case scenario for stocks would be the economic “slump,” which would likely involve a recession that’s severe enough to prompt a dramatic shift in expectations surrounding corporate profits. However, in this scenario, the UBS team expects the growth shock would force the Federal Reserve to consider cutting interest rates more quickly.

The outlook for stocks and bonds in the second half of the year will depend on the economic backdrop. SOURCE: UBS

Mark Haefele, chief investment of …

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