- The sizzling rally in stocks will come to an end, as the risks of recession have only been postponed, JPMorgan said.
- Though investors are less worried about a downturn, some areas of GDP data are still weak, and interest rates remain high.
The sizzling rally in stocks is coming to an end soon as investors are about to realize that a recession has only been postponed, not avoided, according to JPMorgan.
After a dismal performance in 2022, the S&P 500 has jumped 5% since the start of the year, largely spurred by positive economic data. December inflation clocked in below economists' expectations at 6.5%, and fourth-quarter GDP showed the economy grew a robust 2.9%, leading some investors to worry less about a recession.
Not so fast, said JPMorgan strategists led by Marko Kolanovic.
"We believe investors should fade the [2023] rally as recession risks are merely postponed rather than diminished," the bank said in a note on Monday, warning investors not to grow too bullish on the latest gains in stocks.
Markets are now pricing in a 59% chance of a downturn, compared to a 90% chance in mid-October.
But that optimism about the economy could be premature, strategists warned. They noted that while headline GDP was strong, the report showed weaker performance in specific areas, such as private demand, fixed investments, and exports – all signs that economic activity is slowing down.
"A weak trajectory for US domestic demand keeps recession risk elevated, even as the tightness in labor markets postpones this recession risk," the note said.
That weakness is also exacerbated by high interest rates, strategists said, with the fed funds rate approaching 5%.
Central bankers hiked interest rates aggressively last year in a scramble to bring down inflation and cool the hot labor market, but rates that high could easily tip the economy into a recession, experts warn.
At 4.25%-4.50%, the benchmark rate is currently at its highest level since the 2008 recession, and markets are broadly expecting at least two more 25-basis-point hikes before the Fed pauses its tightening efforts.
"Unless the Fed starts cutting its nominal policy rates, these restrictive real policy rates would represent an ongoing headwind, keeping the risk of an eventual recession later in the year relatively high," strategists added.
Separately, JPMorgan's chief investment officer warned that a recession was needed in order for inflation to come down.
CEO Jamie Dimon also has said he saw at least a mild recession hitting the US economy this year, though his team was preparing for a more serious downturn. That could cause the S&P 500 to lose 20%, he predicted, forecasting another tough year for stocks.