Investors are still underestimating the Fed's willingness to trigger a recession and a 'market meltdown', a veteran SocGen strategist says
- The Federal Reserve now prioritizes curbing inflation over preventing recession, according to Société Générale's chief market strategist.
- Aggressive interest rate hikes will trigger a "market meltdown", Albert Edwards said.
Markets haven't yet fully priced in the threat of a recession, which means that stocks will plunge much further over the next few months, according to Société Générale's chief market strategist.
Albert Edwards said the Federal Reserve is now prioritizing taming inflation above avoiding a "market meltdown", even though equities have suffered a broad and deep sell-off in 2022.
"Market meltdown looms," he said in a recent research note. "The Fed has, in an act of penance for allowing inflation to get out of control, donned a horse-hair shirt and is fully prepared to drive the US economy into a recession."
The Fed announced it would hike interest rates by 75 basis points last week. It's tightening monetary policy to try to curb inflation, which surged to a four-decade high of 8.6% in May.
But the central bank's hawkishness has spooked investors, causing stocks to plummet. The S&P 500 has fallen 12.8% since the Fed announced it would start raising rates on March 16.
Bullish investors have argued that markets have now slid enough to have fully priced in a recession. That's unlikely, according to Edwards.
"Market commentators are now determinedly saying that the recession will be shallow," he said. "That is a normal spurious landmark we pass at this stage in the cycle before all hell breaks loose and both the economy and markets collapse."
Negative economic growth would also drag down commodity prices, Edwards said. Oil has dropped off over the past month, with Brent crude sliding 7.8% to $107 a barrel and WTI crude tumbling 10% to just under $105 a barrel.
"I still see commodity prices plunging," Edwards said. He noted that the asset class entered a bear market during the 2008 recession, when the price of a barrel of WTI crude oil fell $133.88 to $39.09 in under a year.