JPMorgan and Morgan Stanley Strategists Wary of Stock Market Rally

Feb 20, 2023

Recent rallies in the stock market may be short-lived, and investors should brace for more pain in 2023. Those sentiments echoed by strategists at JPMorgan insist the selloff experienced last year is far from over. According to the strategists, the ongoing rally could fade as macroeconomics deteriorates amid the recession risk.

JPMorgan Warning

The sentiments come against the backdrop of investors turning optimistic amid expectations that the US Federal Reserve has peaked on monetary policy tightening. However, according to the strategists, stocks are poised to register fresh declines amid weaker economic growth, sky-high inflation and stubborn central banks that remain hawkish.

Global equities have posted significant gains in 2023 amid growing hopes that the Fed will go slow on monetary policy and initiate interest rate cuts later in the year. In addition, the reopening of China following COVID-19 lockdowns and the easing of the energy crisis in Europe have all helped fuel investor sentiments in the market.

Nevertheless, the strategists at JPMorgan believe the aggressive monetary policy tightening has already damaged the economic outlook, with interest rates at decade highs after recent hikes, the strategists fear that the economy could overheat, resulting in a recession. While the Fed is likely to pivot in case of a more negative macroeconomic backdrop, any response would come much later, which could hurt the equities.

Monetary Policy Tightening Impact

In the past, equities have bottomed out after massive selloffs on the Fed advancing interest rate cuts. However, that has yet to be the case amid the current rallies. Instead, stocks have rallied and showed signs of bottoming out on the Fed, only reducing the percentage of an interest rate hike to a quarter a percentage point from half a percentage point in the previous hike.

The Fed taking the Fed funds rate to the target range of 4.5% to 4.75% has triggered a significant increase in borrowing costs. With high borrowing costs amid high inflation levels, companies and people need help accessing cheap capital to fuel economic activity. Consequently, the prospect of the economy plunging into recession amid the high borrowing costs.

Stocks Outlook 2023

Strategists and analysts believe the first quarter will be the highest point equities reach this year, followed by a significant pullback in the continuation of sell-offs experienced last year. Moreover, the team at JPMorgan expect the rally to fade as monetary indicators such as the heavily inverted yield curve and monetary supply raise serious concerns about the economic outlook.

Echoing similar sentiments are analysts at Morgan Stanley led by Michael Wilson. The analysts believe the recent bear market rally has morphed into a speculative frenzy on expectations that the Fed will pause or pivot from the current monetary tightening. On the other hand, Bank of America analysts believe the US recession has only delayed and is likely to significantly impact stocks once it kicks in sometime in the second half of the year.

The sentiments echoed by the investment banks strategists indicate that the risks stock markets grappled with last year are far from over. Inflation levels remaining high pose one of the biggest tests for the central bank’s monetary policy. The Fed and the European Central Banks remaining hawkish in a bid to clamp down on inflation levels could have a disastrous impact on the global economy, which would take a toll on investors’ sentiments.

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