By David Randall

NEW YORK (Reuters). Wall Street’s outlook is dimming as Wall Street continues to be stung by the Federal Reserve’s decision to increase interest rates in an effort suppressed the most inflation for decades. U.S. stock prices are at the edge of a bear market, and the warnings of a possible recession grow stronger.

At issue is the so-called Fed put, or investors’ belief that the Fed will take action if stocks fall too deeply, even though it has no mandate to maintain asset prices. The Fed stopped a rate hike cycle early in 2019, following a stock market crisis, is a well-known example.

This time around, the Fed’s insistence that it will raise rates as high as needed to tame surging inflation has bolstered the argument that policymakers will be less sensitive to market volatility – threatening more pain for investors.

BofA Global Research recently found that the Fed is expected to intervene at 3,529 on February, as opposed to the expectations of 3,700 for February. Such a drop would constitute a 26% decline from the S&P’s Jan. 3 closing high.

Recently at 3,840, the index has fallen by around 20% intraday from its high in January. Some definitions have it as a confirmation of a bear market. [.N]

Phil Orlando (NYSE:), chief equity market strategist for Federated Hermes, stated that the Fed “has bigger fish to fry” and is working on increasing his cash reserves. “The Fed put” is dead until they feel confident they won’t be behind the curve.

Some investors have been enduring a hard road. BofA’s survey showed cash allocations at a two-decade high, while bets against technology stocks stand at their highest since 2006.

Strategists at Goldman Sachs (NYSE:), meanwhile, earlier this week published a “Recession manual for US equities” in response to client inquiries on how stocks will perform in a downturn. Barclays (LON:) analysts said that numerous negative near-term catalysts mean the risks for stocks “remain firmly stacked to the downside.”

The S&P 500 was recently down 1.5% on Friday, on track for its seventh straight week of losses.

Jason England is the global bond portfolio manager for Janus Henderson Investors. He believes that the Fed needs to lower its tightening by at least 15%, considering how stocks have more than doubled since March 2020’s lows.

He stated that “the Fed is very clear there will be pain ahead”.

Fed already increased rates by 75bps and expects to increase monetary policy by 193bps this year. [/FEDWATCH]When minutes of its May 25th meeting are made public, investors will have a better understanding of the thinking process.

2018 REDUX?

If it ignores warning signs about asset prices, some worry that the Fed could increase volatility. According to analysts at the Institute of International Finance, stocks might be vulnerable to similar selling patterns that rocked the markets late 2018 as many investors felt the Fed was too tightening monetary policy.

“In the past, rising uncertainty and mounting recession risk have had important effects on investor psychology, making markets less tolerant of monetary policy tightening that is seen as no longer warranted,” IIF analysts wrote on Thursday. “The risk of a similar market tantrum (to 2018) is rising again now as markets fret about global recession.”

There are signs that investors have shown resilience. For example, the Cboe Volatility Index, known as Wall Street’s fear gauge, is elevated but below levels it reached during previous major selloffs.

And the ARK Innovation Fund ()The fund, known as the Pandemic Rally, saw net positive inflows totalling $977 million in the six week period, according to Lipper data. It is expected to drop 57% by 2022.

Some investors believe these signals are signs that the markets have yet to bottom. Others are much more optimistic.

Terri Spath is the chief investment officer of Zuma Wealth. She believes that some investors may be re-entering areas of stock market where they have experienced large losses.

She stated that the Fed was already seeing indications they will no longer be required as a buyer last resort.

Analysts Deutsche Bank Less optimistic (ETR)

The Fed “has erred in excess inflation 2020/21 so it cannot afford to repeat that mistake twice” they stated.