January 25, 2023

JPMorgan Chase’s Trading Model Predicts a Market Reversal, But a Choppy Year Ahead

In a week marked by fresh recession fears from Wall Street to Davos, JPMorgan Chase’s trading model has shown that seven of nine asset classes – ranging from high-grade bonds to European stocks – now show less than a 50% chance of a recession.[0] This is a big reversal from October when a contraction was effectively seen as a done deal across markets.[1]

According to a team of strategists led by JPMorgan’s Marko Kolanovic, investors should sell stocks and take profits as the current market rally is set to fizzle.[2] The team warned that fundamentals are deteriorating and the market has been moving up, so the two have to clash at some point.[3]

Kolanovic went on to list positive developments such as China’s reopening from Covid-19 lockdowns and a weaker dollar for market enthusiasm, which have helped create a narrative that the worse is behind us.[3]

Meanwhile, the Federal Reserve is expected to pause its interest rate hikes later this year, but not before it hikes rates by 25 basis points in February and another 25 basis points in March, bringing the Fed Funds Rate to about 5%.[2]

Despite their bearish outlook, JPMorgan still sees the potential for upside in the long term with a 4,200 year-end price target for the S&P 500, representing potential upside of 5% from current levels.[4]

However, before the market reaches those levels, the bank expects the market to retest its lows from 2022, meaning a choppy year ahead for markets.[4] The probabilities of a recession remain at over 50% according to the S&P 500 and base metals.[5]

The strategists concluded by saying that while signs of declining inflation pressures are in principle positive, ongoing tightness in labor markets is likely to put pressure on margins, and may cause central banks to tighten further than markets expect.[6]

0. “JP Morgan: Seven of nine asset classes now show less than 50% chance of US recession – Bloomberg” FXStreet, 23 Jan. 2023, https://www.fxstreet.com/news/jp-morgan-seven-of-nine-asset-classes-now-show-less-than-50-chance-of-us-recession-bloomberg-202301230124

1. “MARKETS LIVE UPDATES: JPMorgan says money managers are reducing the odds on a global recession” The Australian Financial Review, 22 Jan. 2023, https://www.afr.com/politics/federal/morgan-stanley-s-gorman-gets-10pc-pay-cut-20230122-p5cei0

2. “Investors should sell stocks and take profits as the latest rally is set to falter amid surprises from the Fed” Business Insider India, 18 Jan. 2023, https://www.businessinsider.in/stock-market/news/investors-should-sell-stocks-and-take-profits-as-the-latest-rally-is-set-to-falter-amid-surprises-from-the-fed-and-weak-corporate-earnings-jpmorgan-says/articleshow/97102750.cms

3. “‘Outright Negative’ on Stocks: JPMorgan’s Marko Kolanovic Braces for Correction, Hard Landing” NBC Southern California, 25 Jan. 2023, https://www.nbclosangeles.com/news/local/outright-negative-on-stocks-jpmorgans-marko-kolanovic-braces-for-correction-hard-landing/3080799

4. “Stock market outlook: Sell stocks and take profits as rally set to fizzle” Markets Insider, 18 Jan. 2023, https://markets.businessinsider.com/news/stocks/bearish-stock-market-analysis-sell-stocks-take-profits-rally-over-2023-1

5. “JP Morgan sees a lower chance of a US recession” ForexLive, 23 Jan. 2023, https://www.forexlive.com/news/jp-morgan-sees-a-lower-chance-of-a-us-recession-20230123

6. “Fade the ongoing rally in equities – JPMorgan By Investing.com” Investing.com, 18 Jan. 2023, https://www.investing.com/news/stock-market-news/fade-the-ongoing-rally-in-equities–jpmorgan-432SI-2982713

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