Investors who have an optimistic outlook are boosting U.S. stocks, however, they should be alert of any action that goes against the Federal Reserve's plans. That’s the warning from strategists at JPMorgan Chase & Co., who are turning more defensive on stocks and recommending investors fade this year’s stock rally.
Marko Kolanovic, a strategist at JPMorgan Chase & Co., said Monday he's “turning more defensive” on stocks – and recommends investors should fade the stock market rally of 2023 because “a recession is currently not priced into equity markets.”
It is said that investors should not oppose the Federal Reserve (Fed) and instead adjust their investments to take advantage of the US central bank's monetary policies in order to not suffer a loss. Despite the significant media attention surrounding layoffs, the U.S. labor market has remained robust overall; this is evident in the large numbers of new job openings and an unemployment rate that recently reached its lowest level in 53 years.
The U.S. Bureau of Labor Statistics reported on Tuesday that the consumer-price index experienced an increase of 0.5% in January, resulting in a year-over-year rate of 6.4%. Economists surveyed by The Wall Street Journal had predicted a 0.4% increase for January, yet the actual figure was higher.
According to Kolanovic, a downturn in the economy is “eventually necessary” in order to bring inflation down to the Federal Reserve's 2% target, and he believes the chances of the stock market making any gains are “fairly limited”.
Michael Wilson, a strategist at JPMorgan Chase & Co., said the equity market is refusing to accept the reality that monetary policy remains in restrictive territory in the context of an earnings recession that has now begun in earnest.
Wilson believes that the S&P 500 could drop to 3,500, which is the same point it hit in October and would mean a decrease of 15% from where it is now. He highlighted that the S&P 500 is still trading at a relatively high price-to-earnings ratio of 18.5x.
The Federal Reserve increased interest rates from near zero in March to a range of 4.50-4.75%, suggesting there may be further hikes in the future. It appears as though certain government officials are implying that the Federal Reserve of the United States will increase interest rates to a value higher than 5%, and maintain them throughout 2023, in order to bring US inflation down to the 2% target.
0. “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
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. “Morgan Stanley Strategists Say Stocks Ignore Fed, Earnings Reality” Bloomberg, 13 Feb. 2023, https://www.bloomberg.com/news/articles/2023-02-13/morgan-stanley-s-wilson-says-stocks-ignore-fed-earnings-reality
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
5. “Stock market forecast: Risk-reward worst it's been during bear market” Markets Insider, 13 Feb. 2023, https://markets.businessinsider.com/news/stocks/stock-market-outlook-forecast-risk-reward-profile-fed-earnings-recession-2023-2
6. “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