The US economy is headed for a hard landing as the banking crisis makes a recession more likely - and traders should avoid risk, JPM's quant guru says
Turmoil in the US banking system has made a recession more likely, JPMorgan strategists said.
That's bad news for stocks, which have already been battered by tightening monetary policy.
"We stay cautious on risk assets which price in too little recession risk," strategists said in a note.
The US economy is likely on track for a hard landing scenario, with recent bank crises significantly raising the odds of a recession, JPMorgan strategists led by Marko Kolanovic said in a note on Monday.
"The Fed ... is likely already past the point of no return – a soft landing now looks unlikely, with the airplane in a tailspin (lack of market confidence) and engines about to turn off (bank lending)," strategists said, pointing to the recent tumult stemming from the failure of Silicon Valley Bank.
SVB's collapse in recent weeks has upended confidence in the US banking system, sparking a steep-sell off in regional bank stocks. The chaos has raised the risk of recession, experts warn, as banking troubles naturally slow down the economy.
"Even if central bankers successfully contain contagion, credit conditions look set to tighten more rapidly because of pressure from both markets and regulators," the JPMorgan note said.
Investors are now expecting the Fed to ease up on its tightening efforts soon in order to avoid putting more pressure on the financial system. Goldman Sachs analysts last week said the Fed will likely hold off on another rate rise this week. For those that do expect a hike, it'll likely be small, at 25 basis points compared to earlier expectations that the Fed could dial it back up to 50 basis points as inflation proves stubborn.
But while some commentators have interpreted a potential pause as a bullish signal for the stock market, there's likely more trouble ahead for investors, JPMorgan said, as the Fed could move back to raising interest rates more aggressively later on in the year after banking-related volatility subsides.
Meanwhile, a survey of JPMorgan clients found that stock market sentiment is at a record low, with the average equity exposure falling to the 30th percentile.
"We stay cautious on risk assets which price in too little recession risk, while the banking crisis raises the prospect of recession this year as credit is restricted," strategists added.
Other top commentators have been sounding the alarm on a coming recession and more pain for stocks. "Bond King" Jeff Gundlach said he saw a recession hitting the US in the next four months. Morgan Stanley said markets could tip into the worst earnings recession since 2008, causing the S&P 500 to crash another 26%.
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