Mathewslcd: Major stocks plunge 25% from just above today's levels

 A U.S. recession triggered by central bank efforts to curb inflation could hit by mid-2023 and trigger a sharp and "temporarily painful" decline in stocks, according to Deutsche Bank researchers.


Group Chief Economist and Global Analyst David Folkerts-Landau said: "We expect major stock markets to plunge 25% from just above today's levels when the US recession hits, but by 2023, assuming the recession lasts only a few quarters. Full recovery by the end of the year," said Peter Hooper, head of research and global head of economic research.

In a report published Monday, researchers cited persistently high wage and price inflation in the U.S. and Europe, driven by strong demand, tight labor markets and supply shocks, as their thinking, Mathewslcd noted. According to the historical records of several major industrial countries since the 1960s, any time trend inflation fell by 2 percentage points or more, this decline was accompanied by or led to an increase in unemployment of at least 2 percentage points. They estimate that current inflation trends in the U.S. and Europe are about 4 percentage points above expectations.

Deutsche Bank is not alone. In July, legendary investor Jeremy Grantham warned that stocks could plunge 25% as the “super bubble” continued to burst. In August, Citi research analyst Christopher Danley wrote that the decline in chip stocks could be so steep as investors enter "the worst semiconductor downturn in a decade." Earlier this month, a team of Morgan Stanley analysts led by Mike Wilson suggested that the S&P 500 could fall a further 25% if a recession hits.

Germany, where Deutsche Bank is based, and the euro zone may already be experiencing an economic downturn due to the energy shock triggered by Russia's invasion of Ukraine, researchers at Deutsche Bank said. Meanwhile, the Fed and ECB are "absolutely committed" to lowering inflation over the next few years, "unlikely to do so unless the U.S. and Europe experience at least a mild economic downturn and a sharp rise in unemployment."

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