The stock market will fall 13% to a new low for the year after a hot jobs report means inflation will linger and the Fed will keep tightening, Bank of America says

·3 min read
Traders work the floor of the New York Stock Exchange (NYSE)
Traders work the floor of the New York Stock Exchange (NYSE)David Dee Delgado/Getty Images
  • The stock market is poised to hit new lows later this year following July's hot job report, Bank of America said in a Friday note.

  • That's because inflation is likely to linger and the Fed will be forced to continue tightening financial conditions.

  • "Still think end-game SPX is [below] 3,600," BofA said, which represents 13% downside potential.

The stock market is poised to hit a new low in 2022 as good news is now bad news when it comes to investors processing economic data, according to Bank of America's Michael Hartnett.

In a Friday note, Hartnett said a strong July employment report of more than 400,000 new jobs would result in the stock market ripping lower over the next four-weeks. The July employment report ultimately saw a gain of 528,000 new jobs, more than double economist estimates as the economy proves to be resilient.

The S&P 500 immediately fell 1% after the release of the July jobs report before recovering some of its losses. Hartnett expects the S&P 500 to ultimately trade below 3,600, representing potential downside of 13% from current levels.

The strong jobs report means elevated inflation is likely to linger longer than most think, which means the Federal Reserve will be forced to continue with its policy of aggressive interest rate hikes at the next meeting of the Federal Open Market Committee in late September.

Between now and then, the Fed will have two CPI reports and the August employment report to better gauge if it should raise interest rates by another 75 basis points to combat inflation.

Recall that the recent 14% rally in the stock market was supercharged in July by Fed Chairman Jerome Powell's comment that the Fed will not forecast future rate hike plans going forward and instead will solely focus on incoming data to make its decision, leaving the door open for a potential pivot.

If the economic data continues to be strong and inflation persists, expect more interest rate hikes which will ultimately jolt the stock market lower, according to Hartnett.

"[It's] very tough for inflation [of] 2% to 3% [over the] next 12 months without [a] big recession," Hartnett said.

But a recession seems less likely given that the US economy has added more than 3 million new jobs so far this year, helping push the unemployment rate to just 3.5%. Meanwhile, jobless insurance claims remain near historical lows. That strength in the labor market is not typical of an economy that's on the verge of a recession.

Still, high inflation and lukewarm economic growth could open the door to stagflation, which Hartnett expects to return in the fourth-quarter of the year and present a big short opportunity for investors.

"Painful rally for many. We say fade S&P 500 above 4,200, go short S&P 500 above 4,342," Hartnett said.

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