US stocks have rallied in the early months of 2023 amid optimism that an end is in sight to US interest-rate increases as inflation cools.[0] Year-to-date, the S&P 500 US equity index has risen by approximately 8% and the Nasdaq Composite, which is largely composed of technology stocks, has seen an increase of more than 15%.[0]
But the stock market has pushed back against the assumption of rate cuts, with the S&P 500 inching just under 8% and the tech-heavy Nasdaq Composite rising nearly 14% year-to-date.[1]
Marko Kolanovic, a strategist from JPMorgan Chase & Co., has stated that he is becoming more cautious and is advising investors to be wary of this year’s stock rally as “the possibility of a recession is not taken into consideration in equity markets.”[2]
The Fed has raised interest rates from near-zero in March to 4.50-4.75% currently, hinting more hikes could still come.[3] Certain government officials have suggested that the Federal Reserve will increase interest rates higher than 5% during 2023 and then maintain them at that level in order to bring US inflation down to their 2% goal.[1]
Wilson believes that the market is “as far as it can be from reality” during this bear market, and he predicts that the S&P 500 will drop 5% by the end of this year, closing at 3,900 points. If the situation further deteriorates, the index could fall a further 14%, settling at 3,500 points. With the likelihood of a Fed pivot diminishing and earnings deteriorating, the outlook is not good.[3]
In a note, a team led by Mislav Matejka wrote that it is too soon to conclude that the Federal Reserve’s aggressive rate hikes have completely removed the possibility of a recession, as the economic effects of monetary policy can take one to two years to manifest.[4]
It is not common to see an equity low before the Fed has started cutting its rates, and never before the Fed has stopped raising them, according to Monday’s strategists’ note.[4] The repercussions of what has happened are already evident, and there are likely to be more to come.[4]
Lisa Shalett, Chief Investment Officer of Wealth Management at Morgan Stanley, has cautioned that optimistic investors driving US stocks upwards should be careful to not go against the Federal Reserve’s policies.[5]
0. “Optimism about stocks is still too high as the US economy is showing ‘the overheat before the retreat’, JPMorgan strategist says” Yahoo Canada Finance, 17 Feb. 2023, https://ca.finance.yahoo.com/news/optimism-stocks-still-too-high-124717176.html
1. “Pivot away from stocks with investors fighting the Fed: Morgan Stanley” Markets Insider, 14 Feb. 2023, https://markets.businessinsider.com/news/stocks/stock-market-outlook-buy-bonds-fight-the-fed-morgan-stanley-2023-2
2. “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
3. “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
4. “JPMorgan Strategists Say Stock Rally Will Fade” Yahoo News, 20 Feb. 2023, https://news.yahoo.com/jpmorgan-strategists-stock-rally-fade-082219671.html
5. “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