Inflation isn’t going anywhere, and higher rates could spark a 12% downturn for stocks in the coming year, veteran strategist says

• Inflation and higher interest rates aren’t going away, veteran strategist Bill Blain says.

• Blain, the principal of Wind Shift Capital, thinks global inflation is entrenched and rates can’t come down much more.

• Higher rates could crush speculative investments, driving a 12% decline in stocks, he said.

Households and companies may be breathing a sigh of relief as borrowing costs move lower, but they shouldn’t get comfortable because rates and inflation are going to remain high — and that reality could spark a big drop for stocks in the next year, Wall Street veteran Bill Blain said.

Blain, a longtime strategist and principal of Wind Shift Capital Advisors, said he sees a rocky 12 months ahead for the stock market. He said the Fed isn’t poised to take interest rates as low as markets think, and borrowing costs could indeed rise from here. That could crimp lending, slow dealmaking, and take US and global stocks down 7%-12%, he told Business Insider in an interview.

“I think the crunch that we face is what happens when interest rates start to rise, and governments are not in a position to continue boosting the economy in an interest rate rising environment because they’ve lost the support of markets,” Blain said.

In the event of a credit crunch, he doubts the US will be able to dole out stimulus as it did during the pandemic, due to concerns about the overall level of debt and the inflationary impact on the economy.

“It’s the reality that inflation is going to creep back into the global economy. Interest rates are going to have to rise,” he said.

Blain’s forecast may sound counterintuitive to investors who have been pricing in ambitious rate cuts from the central bank.

But the US economy faces too many inflationary pressures over the medium-term to warrant aggressive policy easing, Blain said.

For one, the federal debt has swelled to a historic $35 trillion. Economists have flagged rapid government borrowing as a factor that risks stoking inflation.

Meanwhile, supply chain issues linger, and given rising geopolitical tensions, world trade looks on track to be more fragmented, which can also prop up inflation.

Finally, the threat of high tariffs from former President Donald Trump would impose a tax on nearly all imported US goods that economists say would end up being passed on to the consumer.

“I think inflation is going to be more ingrained, as it was in the 1970s and early ’80s,” Blain said. “It’s going to be a very, very different economy and we just need to get used to it.”

Story Continues