(Bloomberg) — Stock investors who have been overly optimistic about the economic outlook will be disappointed, according to strategists at JPMorgan Chase & Co.
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It’s too early to say a recession is off the table after the Federal Reserve’s aggressive rate-hiking campaign, especially since the impact of monetary policy on the economy can be delayed by one to two years, a team led by Mislav Matejka wrote in one Note. The central bank is likely to pivot only in response to a much more negative macroeconomic backdrop than markets are currently anticipating, they said.
“Historically, stocks typically don’t bottom before the Fed moves ahead with cuts, and we’ve never seen a bottom before the Fed even stopped climbing,” the strategists wrote Monday. “The damage has been done and the consequences are likely yet to come.”
Global equities have rallied this year as hopes of a Fed reversal, China’s reopening and the easing energy crisis in Europe provided support. But signs that US inflation remains an ongoing problem are reappearing, weighing on markets. Comments from dovish Fed officials have also sparked fears that US interest rates could peak higher than previously expected.
The first quarter is likely to mark the highest point for equities this year, said Matejka, who became more cautious on the outlook for equities towards the end of last year after remaining positive for much of 2022. His team expects the rally to peter out amid warning signs from key monetary indicators such as the sharply inverted yield curve and falling money supply in Europe and the US.
JPMorgan strategists are not alone in their pessimistic view. Morgan Stanley’s Michael Wilson — ranked #1 in last year’s Institutional Investor survey for correctly predicting stock sell-offs — said the bear market rally has “turned into speculative madness based on a Fed pause/pivot that… not coming”. a note on Sunday. And last week, strategists at Bank of America Corp. led by Michael Hartnett, that a delayed US recession will weigh on equities in the second half of the year.
On Monday, strategists at Citigroup Inc., led by Robert Buckland, said they would not be chasing the MSCI All Country World Index higher as it is already trading at the high end of their target range. They also said most contrarian trades aimed at selling last year’s winners and buying losers will fizzle, adding that they favor oil stocks over tech, which has been up sharply so far in 2023 is.
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