The stock market is likely to face another slump as economic warning signs abound, JPMorgan warns

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Despite growing hopes that the US may eventually avoid a worries-anticipated recession, economists at JPMorgan warn clients that a barrage of indicators are still sending out more sinister warning signs — making it likely that the economy and stocks will decline in the coming years months, particularly since the impact of It could be years before Federal Reserve rate hikes penetrate markets.

Period,” economists at JPMorgan tell clients about an indicator, noting that stocks have never bottomed before the Fed stopped raising rates. Getty Images

Important facts

“Signals point to problems ahead,” JPMorgan analysts led by Mislav Matejka wrote in a note Monday, postulating a series of warning signs that suggest the recent stock market rally should ease further before the end of March and that this Quarter “possibly” mark the stock market’s high for the year.

For one, the yield curve has remained “heavily inverted” – an event that has preceded every US recession in the past 50 years – despite growing optimism that the US could sidestep an economic downturn; The curve is as inverted as it has been since the 1980s, and JPMorgan warns, “We’ve never escaped a recession from this point.”

In addition, the US money supply, which measures safe assets that households and businesses can use to make payments, has fallen abruptly since March and is negative on an annualized basis for the first time since 2006, while banks have begun enforcing tighter lending standards – leading to a strong one Decline in credit demand typical of previous recessions.

“The damage has been done and the consequences are likely still to come,” the analysts write, warning that it could take up to two years for the Fed’s aggressive rate hikes over the past year to have an impact on the economy.

Mortgage payments as a percentage of income have already doubled from 13% to 26% and the savings rate has fallen to almost zero, but Matejka notes that the Fed is expecting at least two more rate hikes this year, and stocks have never matched a cyclical low before the Fed stopped climbing.

Despite the ongoing bear market, others remain much more optimistic: last week, Goldman economists led by Jan Hatzius put the chance of a recession at just 25% (well below the median forecast of 65%), reflecting the “continued strength of the job market” after a reflects Blockbuster Jobs Report and early signs that companies are becoming more optimistic about the economy.

What to look out for

The Fed is expected to release a summary of its most recent meeting on Wednesday, giving a glimpse of officials’ take on the economy as it continues its most aggressive tightening campaign in decades. Last week, Cleveland Fed Chair Loretta Mester admitted that she saw “compelling” reason for a second half-point rate hike earlier this month, rather than the more modest quarter-point rate hike that was ultimately approved. Although she welcomed the moderation in inflation numbers since last summer, she warned: “The level of inflation matters and it’s still too high.”

key background

Amid record levels of consumer spending and crippling supply chain restrictions, inflation soared to a 40-year high of 9.1% in June, forcing the Fed to hike interest rates to dampen consumer demand and ease rising prices. As the central bank’s rate hikes slow the economy, many pundits have argued the Fed could risk an unnecessary recession, but others have increasingly warned that inflation could remain at historically high levels longer than expected or even flare up again. “Markets are admitting that the Fed may not be quite done yet,” Sevens Report strategist Tom Essaye wrote in a note Tuesday, as shares fell after worse-than-expected retail earnings.

What we don’t know

Although it’s unclear when the Fed will halt hikes, analysts at Goldman and Bank of America added another rate hike to their forecasts after inflation came in hotter than expected last week. They now expect the central bank to hike rates to a peak of 5.5%, possibly the highest level in more than 20 years.

Further reading

Dow loses 400 points as retail eats into 2023 ‘FOMO’ rally (Forbes)

Fed official warns hot inflation data will serve as ‘red flag’ (Forbes)

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I’m an associate editor at Forbes, covering markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I majored in business journalism and economics while working for UNC’s Kenan-Flagler Business School as a marketing and communications assistant. Prior to Forbes, I spent a summer covering LA’s private sector for the Los Angeles Business Journal and covering North Carolina public companies for NC Business News Wire. Contact [email protected] And follow me on Twitter @Jon_Ponciano

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