Markets should brace for a period of central bank-induced turmoil before the Fed dials back on rate hikes, and stocks could soon retest recent lows, JPMorgan says
Stocks could be in for another bout of volatility before the Fed pivots from aggressive rate hikes, JPMorgan warned.
That's because the Fed and other central banks could inject more volatility before backing down from raising rates.
Stocks could retest recent lows in the first quarter of 2023, strategists predicted.
Markets should brace for another period of central bank-induced turmoil before any pivot away from rates hike, and that means stocks could soon retest recent lows, JPMorgan strategists wrote in a note on Wednesday.
That's because the Fed is likely to overtighten the economy after hiking rates nearly 400 basis-points this year to control inflation. Looking ahead, there's good news and bad news on the horizon for markets in 2023, strategists said.
"The good news is that central banks will likely be forced to pivot and cut interest rates sometime next year, which will result in a sustained recovery of asset prices and subsequently, the economy," the note said. "The bad news is that this will require central banks (primarily the Fed) to cut interest rates, and in order for that pivot we will need to see some combination of more economic weakness."
That weakness could manifest in areas like a surge in unemployment, a fall in risky asset prices, and general market volatility, which could spell more downside for stocks. And signs of stress are already starting to bubble to the surface: dysfunction in US bonds are flashing a warning for "unsettling volatility", according to top economist Mohamed El-Erian, and the yield curve is seeing the steepest inversion since 1981.
If the Fed pushes forward with more rate hikes, that would put further pressure on corporate earnings, and could send the S&P 500 tumbling back to a recent low of 3577 seen in October, the strategists predicted. That retest could come as soon as the first quarter of 2023, the note warned, echoing predictions by Morgan Stanley and Bank of America for the stocks to bottom in the first half of next year.
Other market commentators have raised concerns that the Fed will overtighten the economy, potentially squeezing the US into a painful recession. Wharton professor Jeremy Siegel said the odds of a recession were "virtually 100%" if the Fed continued hiking rates into 2023.
Others say the Fed needs to tighten even more to declare a victory on inflation, which still remains well-above the Fed's 2% target. St. Louis Fed president Jim Bullard estimated the central bank would push rates as high as 5.25%, and investors are pricing in another 50-basis-point hike in December. That would take the fed funds rate to a range of 4.25%-4.5%.
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