Optimistic investors have sent US stocks higher in 2023, but JPMorgan Chase & Co. strategist Marko Kolanovic is warning investors to be cautious and “turn more defensive.”[0] Kolanovic argues that the market is not pricing in the risk of a recession, and is instead too complacent of inflationary pressures.
Kolanovic is not alone in his concern as a team of strategists led by Michael Wilson also warned that markets are “overpricing recent good news on inflation and are complacent of risks.” The old adage “Don’t fight the Fed” refers to the idea that investors should align their portfolios to benefit, rather than lose out, from the US central bank’s monetary policies.[0]
Despite gathering headlines on layoffs, the US labor market has remained strong, with large numbers of new job openings and a recent 53-year low in the unemployment rate.[0] The economy could experience a “soft landing” if the job market remains resilient and real wages are strong enough to support consumption.[1] However, strong wages and spending would likely add to inflationary pressures and thus provide little rationale or incentive for the Fed to cut rates.[1]
The US Bureau of Labor Statistics reported that the consumer-price index rose 0.5% in January for a year-over-year rate of 6.4%.[2] Economists polled by The Wall Street Journal had forecast for January.
Kolanovic believes that an economic downturn will “eventually be necessary” to cool down inflation to the Fed’s 2% target.[3] He cautioned that the potential upside for markets is likely “fairly limited,” given stretched valuations and high rates.[3]
Wilson is predicting that the S&P 500 will drop to 3,500, similar to the October low and a 15% decrease from the present price.[4] He believes that the market is “about as disconnected from reality as it’s been during this bear market,” and posits the S&P will fall 5% to end the year at 3,900 points, but could tumble as much as 14% to 3,500 if things get much worse.[4]
In conclusion, the market may be pricing in too much optimism, with analysts not accounting for the potential of a recession and the implications of Fed rate hikes.
0. “Three reasons warrant a period of profound uncertainty – Morgan Stanley” FXStreet, 16 Feb. 2023, https://www.fxstreet.com/news/three-reasons-warrant-a-period-of-profound-uncertainty-morgan-stanley-202302161513
1. “Market Sentiment: Too Bullish to Start 2023?” Morgan Stanley, 15 Feb. 2023, https://www.morganstanley.com/ideas/market-sentiment-bullish-q1-2023
2. “‘Underlying bullish tenor’: U.S. stocks fare surprisingly well as Treasury yields rise after hotter-than-expected inflation, says Morgan Stanley’s Andrew Slimmon” MarketWatch, 14 Feb. 2023, https://www.marketwatch.com/story/underlying-bullish-tenor-u-s-stocks-fare-surprisingly-well-as-treasury-yields-rise-after-hotter-than-expected-inflation-says-morgan-stanleys-andrew-slimmon-76c0299d
3. “JPMorgan’s Kolanovic Urges Investors to Ditch Stocks for Bonds” Financial Post, 13 Feb. 2023, https://financialpost.com/pmn/business-pmn/jpmorgans-kolanovic-urges-investors-to-ditch-stocks-for-bonds
4. “Stock Market Just Made The ‘Same Mistake Again’—Here’s Why Experts Are Worried About The Latest Rally” Forbes, 13 Feb. 2023, https://www.forbes.com/sites/jonathanponciano/2023/02/13/stock-market-just-made-the-same-mistake-again-heres-why-experts-are-worried-about-the-latest-rally