JPMorgan Chase
Daniel Pinto.
- The market correction in February 2018 may be mere child's play compared with what's looming on the horizon.
- Daniel Pinto, JPMorgan co-COO and head of corporate and investment banking, says a 30% to 40% correction is possible in the next couple years.
It was only a month ago, but the wild stock market gyrations in early February have already seemingly faded into a distant memory.
Despite a record one-day point decline on the Dow Jones index, many Wall Street experts believe the sell-off was less tied to fundamentals and was instead exacerbated by volatility-linked products and algorithmic trading.
A real, more thorough market correction - accompanied by jolts of volatility - is still potentially looming on the horizon.
It may not happen this year, but a 30% to 40% correction is on the table, according to Daniel Pinto, the head of JPMorgan Chase's industry-leading corporate and investment bank, who was promoted to co-president and co-COO in January.
Pinto recently told Business Insider how it all could play out.
The stock market likely still has room to run, he said, since equities are "mainly driven by economic growth and healthy earnings, and we are seeing both right now."
But, what typically happens in this cycle, is interest rates start to accelerate, leading credit spreads - essentially the gap between how much more of a return bonds provide compared with US treasuries - to compress.
Opinions vary widely, but the Federal Reserve could hike interest rates four or more times this year to keep up with the strong US economy.
But, credit spreads eventually reach a point where they can't compress any further, and then they "usually start to widen for several months before there is a correction in equities."
"Normally that's the cycle. Interest rates rise, credit catches up, and then equities correct," Pinto said.
Inflation, which the Federal Reserve keeps a close eye on when determining whether to raise rates, will be the main factor, Pinto said.
"My core view is that this will be gradual, so we're not talking about something imminent," Pinto said, "but when the cycle does turn, maybe in a year or two or three - who knows? - you could see a correction of maybe 30% or 40% peak to trough, maybe more, with some volatility in-between."
If a correction that severe does materialize, the market turmoil of February 2018 will seem a tame affair by comparison.