Recession is coming and it could send stocks plummeting 26% as dwindling savings rates spark a ‘vicious cycle’ in the economy, strategist says

Feb 23, 2024

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  • A recession is still in the cards for the US, according to BCA strategist Roukaya Ibrahim.

  • Ibrahim predicted a downturn would come sometime before early 2025.

  • Once the economy slips into a contraction, stocks could plunge 26%, she warned.

A recession is still on the way even as optimism pervades across Wall Street, and stocks are at risk of a steep plunge when a downturn hits, according to BCA strategist Roukaya Ibrahim.

In an interview with Fox Business Network on Thursday, Ibrahim said the economy would likely tip into a downturn before early 2025. Once a recession strikes, the S&P 500 could fall as low as 3,500, she predicted, which would take the benchmark index around 26% lower from its current levels.

That outlook is based on the Federal Reserve’s “aggressive” monetary tightening since March 2022, Ibrahim said. Interest rates are now the highest they’ve been since 2001, a level economists have long-warned could overtighten financial conditions and push the US into a recession.

Economists have also said that the full effects of Fed rate hikes are still working their way through the economy, though signs of damage of already beginning to bubble to the surface. Auto loan delinquencies are rising, Ibrahim noted, a signal that consumers are falling behind their debt payments as inflation bites and borrowing costs rise.

Meanwhile, the savings rate in the economy remains near a record low: Americans saved just 3.7% of their income in December, which is about half of what the personal savings rate was in 2019.

Consumers are poised to save more and spend less as they continue to feel the pinch of tighter financial conditions, Ibrahim suggested. Americans likely blew through their excess savings from the pandemic in the third quarter of 2023, a San Francisco Fed study found. JPMorgan estimated at the end of last year that 99% of Americans will be financially worse-off this year than they were pre-pandemic.

“As that occurs we’ll probably see a vicious cycle occur in the economy,” Ibrahim warned.

Once the economy does slip into a recession, stocks will be vulnerable, she added, especially since investors appear so bullish about the market. 44% of investors said they felt bullish on stocks over the next six months, according to the American Association of Individual Investors’ latest Investor Sentiment Survey.

According to Ibrahim, the stage is set for corporate earnings to fall around 10% once a recession strikes, forming the basis of her 3,500 price target for the benchmark index.

Other market commentators have warned of a coming recession and the risks posed to stocks. According to the “full model,” the US has an 85% chance of slipping into a downturn, the highest probability recorded since the 2008 Great Financial Crisis. Meanwhile, New York Fed economists are pricing in a 61% chance the US slips into recession sometime before January 2025.

Read the original article on Business Insider

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