Carlo Allegri/Reuters
Now is not the time for investors to take a "victory lap", JPMorgan Asset Management has warned, in a gloomy 2024 outlook that clashes with the cheerier Wall Street consensus.
In a research note seen by Business Insider, strategists said that a recession still isn't off the table, with the economy yet to feel the brunt of higher interest rates.
"Economies have so far coped remarkably well with higher rates. Coupled with signs that pandemic-related inflation is easing, the market narrative has shifted towards the prospect of a soft landing," a team led by Karen Ward wrote, referring to the scenario where inflation falls toward the Federal Reserve's 2% target without a slump in growth.
Between March 2022 and July 2023, the central bank raised interest rates from near-zero to around 5.5% in a bid to clamp down on runaway inflation, which has cooled from four-decade highs. Meanwhile, the US economy has remained strong in 2023, with third-quarter growth coming in at a better-than-expected 4.9% and the unemployment rate holding steady.
But JPMorgan Asset Management believes the economy will feel the full force of higher rates next year, with the Fed's tightening campaign likely to chip away at listed companies' earnings and drag down stock prices.
"We would urge caution against taking a victory lap too early. It is the 'long and variable lags' in monetary policy that so often plague economic forecasters," Ward's team said.
"When consumer confidence turns, it turns quickly," they added. "Forecasting the direction of economies is hard, but forecasting the timing of a recession is even harder."
JPMorgan Asset Management's view that stock prices remain vulnerable to higher interest rates clashes with the consensus on Wall Street, with several big-name banks predicting that the S&P 500 will set new all-time highs next year. The benchmark index has already climbed 19% year-to-date, powered higher by massive gains by the "Magnificent Seven" group of mega-cap tech stocks.
Bank of America's Savita Subramanian said last week that she's expecting the gauge to climb 10% from its current level to hit a record 5,000 points by the end of the year, while BMO's Brian Belski and Deutsche Bank's Binky Chadha have each set 5,100-point price targets.
Part of the banks' bull case is that the Fed will start slashing interest rates from mid-2024 in an effort to prop up the economy. Traders expect those cuts to come from May onwards, per CME Group's FedWatch tool. When interest rates fall, stocks tend to benefit because it becomes cheaper for listed companies to borrow, boosting their future cash flows.
But investors shouldn't count on the central bank lowering borrowing costs unless the US economy falls into a severe recession, Ward's team warned.
"We think it's too early for the central banks to declare outright victory over inflation, and anticipate that rate cuts in 2024 are unlikely to pre-empt economic weakness," they wrote.
"We therefore think interest rates could be set to fall later than the market currently expects," they added.
JPMorgan Asset Management added that investors should focus on "locking in yields" on bonds, rather than loading up on stocks, as the clock turns to 2024. Yields on 10-year Treasury notes are up nearly 80 basis points to 4.29% this year and touched a 16-year high in October, driven higher by the Fed's tightening campaign.
