Most stocks with recession risks should be avoided by investors.
The Federal Reserve and other central banks have underestimated the severity of the recession that could result from their rate hikes, according to a $10 trillion asset manager.
According to a recent research note, many central banks aren't acknowledging the extent of recession needed to quickly reduce inflation We don't like most stocks because markets haven't priced that.
The Fed hiked interest rates for the third time in a row.
Last week, the US central bank indicated that it will raise interest rates as high as 4.6% by the end of next year, and Chairman Powell acknowledged that the US faces a period of below-trend growth.
The Fed's economic projections underestimate the likelihood of a soft landing, according to the team. The Fed was able to cool inflation with interest rate hikes.
The Fed sees positive growth this year and it will pick up next year according to the strategists. It wants to see evidence that core inflation is on a 2% trajectory before it stopsHiking.
The soft landing doesn't add up to the team.
The Bank of England implemented a 50-basis-point hike and the Riksbank hiked its rate by 100 basis points.
The Fed's optimistic outlook is thought to be shared by other central bankers. Before inflation has cooled sufficiently, central banks will be torn between raising and cutting rates, according to a warning by BlackRock.
The Fed is focused on getting core inflation back to 2% without fully acknowledging how much economic pain it will take in a world shaped by production constraints. Last week's rate hike was a case in point.
"This all suggests a clear sequence: overtighten policy first, significant economic damage second and then signs of inflation easing only a few months later," the strategists said.
Powell showed the most resolve since Paul Volcker when he said markets will get "Fed up" with too much tightening.
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