Navigating Rising Rates and Declining Inflation: A Cautionary Approach to the Stock Market
By The US central bank has raised rates from nearly zero to almost 5% within the past year in response to historic inflation.[0] By increasing the interest rate, it can put a stop to rising prices by making borrowing more expensive and encouraging people to save instead of spending and investing.[0] However, they can also crimp demand and sap economic growth.[1] JPMorgan Chase & Co. strategist Marko Kolanovic warned that investors should fade the stock market rally of 2023 due to a recession that is not currently priced into the market.[2]
Wilson, a top-ranked strategist in last year’s Institutional Investor survey, expects deteriorating fundamentals, along with Fed hikes that are coming at the same time as an earnings recession, to drive equities to an ultimate low this spring.[3] He anticipates the S&P 500 to end the year at 3,900 index points, about 4.7% below where the gauge closed on Friday, with a rough ride to get there.[4]
According to Kolanovic, an economic downturn is needed to bring inflation to the Federal Reserve's desired level of 2%. He believes there is only a small chance of the stock market increasing in value. He cautioned that a recession will “eventually be necessary” to bring inflation back to central-bank targets and said the potential upside for markets is likely “fairly limited,” given stretched valuations and high rates.
US inflation data could be a catalyst to bring investors back to reality, and get stocks in line with bonds again, if prices rose more than expected.[5] It is anticipated that the information released on Tuesday will illustrate a 0.5% rise in consumer prices during January, mainly due to an increase in the cost of gasoline.[6] This would be the largest increase in three months.[7]
Yields on US two-year notes last week exceeded 10-year yields by the highest amount since the 1980s, which could be an indication of diminishing certainty in the strength of the economy in the face of further rate increases.[5] The Wharton professor warned that the Federal Reserve may continue to increase interest rates in order to maintain inflation levels.[4]
Overall, investors should remain vigilant as the US continues to navigate a period of rising rates and declining inflation. With the potential for inflation to pick up and the Fed continuing to hike interest rates, investors may have to take a more cautious approach to the stock market.[8]
0. “Wharton's Siegel: Stocks will keep surging, house prices will tumble” Markets Insider, 9 Feb. 2023, https://markets.businessinsider.com/news/stocks/jeremy-siegel-wharton-stocks-house-prices-market-outlook-predictions-fed-2023-2
1. “Wharton's Siegel: strong US jobs data may hit stocks, lead to recession” Markets Insider, 6 Feb. 2023, https://markets.businessinsider.com/news/stocks/wharton-siegel-jobs-report-economy-stock-market-outlook-fed-recession-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. “Morgan Stanley says the stock market is ‘disconnected from reality’ and it’s going to hit bottom this Spring” Fortune, 13 Feb. 2023, https://fortune.com/2023/02/13/morgan-stanley-stock-market-downturn-bottom-this-spring-disconnected-from-reality/
4. “Stock market poised for next leg lower as profits shrink, says Morgan Stanley's Mike Wilson” msnNOW, 6 Feb. 2023, https://www.msn.com/en-us/money/markets/stock-market-poised-for-next-leg-lower-as-profits-shrink-says-morgan-stanleys-mike-wilson/ar-AA17aOnc
5. “Morgan Stanley Strategists Say Stocks Ignore Fed, Earnings Reality By Bloomberg” Investing.com, 13 Feb. 2023, https://www.investing.com/news/stock-market-news/morgan-stanley-strategistssaystocks-ignore-fed-earnings-reality-3001446
6. “‘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
7. “Morgan Stanley strategists say stocks ignore Fed, earnings reality” Moneycontrol, 13 Feb. 2023, https://www.moneycontrol.com/news/world/morgan-stanley-strategists-say-stocks-ignore-fed-earnings-reality-10069901.html
8. “‘Edge of a swamp’: JPMorgan strategist sees ‘one time only sale’ in fixed income as U.S. economy slows” MarketWatch, 7 Feb. 2023, https://www.marketwatch.com/story/edge-of-a-swamp-jpmorgan-strategist-sees-one-time-only-sale-in-fixed-income-as-u-s-economy-slows-11675774251
