If the Federal Reserve raises interest rates seven times this year, as Ethan Harris, head of global economics at Bank of America, predicted, the stock market will not be immune to those hikes.
“I think it’s a flat market, to be honest,” Harris told Yahoo Finance Live on Monday. “I think so far we’ve had some short-term corrections and the markets have had to deal with the Fed not being completely friendly going forward. They’ve helped boost the stock market. Now , they’re withdrawing that promise. I think the market will be fine. I don’t think it’s going to be a great year.”
Goldman Sachs’ Jan Hatzius raised his own rate hike expectations to five this year from four after Harris’ call a week ago, which included cutting BofA’s 2022 GDP growth estimate to 3, 6% versus 4%.
Markets have had a bad start to the year as traders handicap calls from strategists such as Harris and Hatzius for much higher interest rates.
The Nasdaq Composite is heading for its worst start to January. Down 10% until Monday afternoonthe Nasdaq for January could exceed the 9.9% drop seen in January 2008, which had been the worst.
About 46% of Nasdaq members are down at least 50% from their 52-week highs, according to Charles Schwab, chief investment strategist Liz Ann Sonders. Zooming out does not give a better picture. About 76% of Nasdaq members are down at least 20% from their 52-week highs.
Meanwhile, stocks trading at exorbitant valuations have come under fire as traders model future returns below expectations due to rising rates. Shares of AMD (AMD) plunged 23% in January, Etsy (ETSY) lost 33% and Netflix (NFLX) was down 36%.
Granted, not everyone on the street is taking risks in what is a cheaper stock market today compared to a month ago.
Goldman Sachs strategist Peter Oppenheimer argues that this period of heightened volatility is normal market behavior before a change in Fed policy.
“This is a correction in a bull market cycle. In our view, we are still in the early part of the growth phase – returns are likely to be low, but the bull market should continue (as long as economies grow ). In common with previous cycles, we believe this phase will be less bifurcated in terms of factor and sector leadership,” Oppenheimer said in a recent note.