- The Federal Reserve won't 'save the day' for stocks next year, a BlackRock Investment Institute team said.
- The US central bank isn't likely to cut interest rates in 2023 even in a recession, they warned.
Don't assume the Federal Reserve will bail out US stock markets and bonds next year if they get hammered by a severe recession, a team of BlackRock strategists has warned.
On Thursday, the US central bank is expected to raise interest rates for the seventh time in 2022, as it tries to curb high levels of inflation. While the rate of price rises has cooled from recent 40-year highs to 7.1% in November, that's still far above its 2% target.
The Fed's actions are likely to fuel a selloff in stocks in 2023, as its tightening campaign plunges the US into a recession, the strategists at BlackRock's Investment Institute said.
"Major central banks will hike rates again this week: getting inflation down means they need to crush demand, making recession foretold," they wrote in a research note published Monday.
"We expect central banks to keep rates high as recession unfolds — not save the day."
The Bank of England and the European Central Bank are also expected to increase interest rates at meetings Thursday, as they carry out their own price-rise campaigns.
Central bank tightening aims to bring down inflation by driving down consumer and business demand — by making it more expensive to borrow, for example. But that hits activity, which increases the threat of an economic recession that will weigh on stocks.
The Fed, the BoE and the ECB are so focused on restoring price stability that they are unlikely to support financial markets and the economy by slashing interest rates, even if there's a recession, according to the BlackRock team led by economist Jean Boivin.
"Markets are wrong to expect them to later come to the rescue," they said.
BlackRock's bearishness comes even though stock markets have rallied in recent weeks, buoyed by the idea the Fed might "pivot" — or switch back its course — to begin easing up on tightening in the second half of 2023.
The benchmark S&P 500 US stock index has gained 8.6% since the Fed raised rates by 75 basis points on November 2. Meanwhile, yields on 10-year Treasury notes have retreated 60 basis points to 3.45% on the expectation the cost of borrowing will fall.
But Boivin's team said that they'd stay clear of both equities and fixed income. They believe the markets' recent overperformance is based on an assumption the Fed will return to its "old playbook" of low interest rates and loose monetary policy, which it used after the 2008 financial crisis and other earlier recessions.
"Treasury yields have slid as the market expects Federal Reserve rate cuts, with the yield curve inverting more," the strategists wrote. "We think that incorrectly reflects hopes for an old recession playbook and stay underweight developed market stocks and long-term bonds."