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It’s too early to say a recession is off the table following the Federal Reserve’s aggressive hiking campaign, especially since monetary policy’s impact on the economy can have a lag of one to two years, a team led by Mislav Matejka wrote in a note. The central bank is likely to pivot only in response to a much more negative macroeconomic backdrop than markets are currently expecting, they said.
“Historically, equities do not typically bottom before the Fed is advanced with cutting, and we never saw a low before the Fed has even stopped hiking,” the strategists wrote on Monday. “The damage has been done, and the fallout is likely still ahead of us.”
Global equities have rallied this year as hopes for a Fed pivot, China’s reopening and Europe’s easing energy crisis provided support. But signs that inflation remains a persistent problem in the US are starting to show once again, weighing on markets. Commentary from hawkish Fed officials has also sparked fears that US rates could peak higher than previously expected.
The first quarter is likely to mark the highest point for stocks this year, said Matejka, who turned cautious on the outlook for stocks toward the end of last year after remaining positive for much of 2022. His team expects the rally to fade amid warning signs from key monetary indicators such as the heavily inverted yield curve and money supply moving lower in Europe and the US.
The JPMorgan strategists are not alone in their pessimistic outlook. Morgan Stanley’s Michael Wilson — ranked No. 1 in last year’s Institutional Investor survey when he correctly predicted the selloff in stocks — said the bear market rally “has morphed into a speculative frenzy based on a Fed pause/pivot that isn’t coming” in a note on Sunday. And last week, Bank of America Corp (NYSE:BAC) strategists led by Michael Hartnett said the delayed arrival of a US recession will weigh on stocks in the second half of the year.
On Monday, Citigroup Inc (NYSE:C) strategists led by Robert Buckland said they wouldn’t chase the MSCI All Country World Index higher as it’s already trading at the top end of their target range. They also said that most contrarian trades that call for selling last year’s winners and buying the losers are set to fizzle out, adding that they favor oil stocks to tech which has soared so far in 2023.
©2023 Bloomberg L.P.
