There's an 85% chance of a recession based on stock market price action as gloomy talk of a downturn becomes self-fulfilling, JPMorgan says

• The stock market is currently pricing in an 85% chance of an economic recession, according to JPMorgan.
• Both investors and consumers are concerned about an imminent recession amid rising inflation and higher interest rates.
• "There appears to be heightened concerns about the prospect of a US recession which could become self-fulfilling if they persist," JPMorgan said.

The chance of an economic recession materializing has surged to 85% based on the current price action of the stock market, JPMorgan said in a note this week.

The S&P 500 officially entered bear market territory earlier this week, and is now down more than 23% year-to-date. According to JPMorgan, the S&P 500 has experienced an average decline of 26% during 11 prior recessions.

That doesn't mean all the damage in stocks is done, as both consumers and investors grow increasingly worried about 40-year records in inflation and fast-rising interest rates. The Federal Reserve hiked interest rates by 75 basis points on Wednesday, and is expected to make an interest rate hike of the same magnitude next month.

But gloomy talk about an imminent recession could become self-fulfilling if it persists, JPMorgan said, and confidence in the economy often has an outsized influence on the spending habits of both consumers and corporations.

"Whether one looks at web searches or market pricing there appears to be heightened concern about the prospect of a US recession which by itself has the potential to become self-fulfilling," JPMorgan said.

The bank highlighted that Google search trends for the word "recession" have already surpassed the high seen in 2008 and are fast approaching the historical high from March 2020.

Following the Fed's sharp interest rate hike, a growing concern among investors is the possibility of a central bank policy mistake, according to JPMorgan. A policy mistake is the idea that the Fed was too late to hike interest rates to tame inflation, and in response may go too far in its tightening plans, which can in turn break the economy and result in future interest rate cuts.

"Not only has the inversion worsened at the front end of the US curve with almost 100bp of policy reversal (i.e. Fed rate cuts) priced in over two years following a 4% peak Fed funds rate in May 2023, but an inversion at the front end started showing up in the Euro area curve also. In other words, there are first signs of an ECB policy mistake also," the bank said.

But JPMorgan quant guru Marko Kolanovic still expects the Fed to stick a soft landing and avoid a recession as the economy continues to recover from the COVID-19 pandemic.

That forecast will fall flat if pessimism among consumers and businesses persist, increasing the chance that investors talk themselves into an economic recession becomes self-fulfilling. And right now, it seems more than likely after US Consumer Confidence fell to a record low last week.