JPMorgan’s Marko Kolanovic expects a 20% selloff to hit the S&P 500.
According to the Institutional Investor Hall-of-Famer, high interest rates are creating a breaking point for stocks – and choosing cash with a 5.5% yield in the money market and short-term Treasury bonds is a key protective strategy right now.
“I’m not sure how we can avoid this [recession] if we stay at this level of interest rates,” the company’s chief market strategist and co-head of global research told CNBC’s “Fast Money” on Thursday.
The S&P 500 closed at 4,258.19 on Thursday, beginning a five-week losing streak. The index has fallen more than 5% in the last month.
Kolanovic believes the weakness is not a strong sign that a huge downtrend is already here. He points out that a short-term recovery is still possible as much depends on the economic reports in the next few months.
“[We’re] “This doesn’t necessarily require an immediate sharp decline,” he said. “Could there be another five, six, seven percent increase in stocks?” Of course… But there is a disadvantage. It could be a 20% loss.
He warns that the “Magnificent Seven” stocks, which include Apple, Amazon, Meta, Alphabet, Nvidia, Tesla and Microsoft, are among the stocks most vulnerable to sharp losses because of their historic gains amid high interest rates . The group is up 83% so far this year, accounting for most of the S&P 500’s gains.
“If there’s a recession, I think that’s great [seven]… will catch up where the rest is,” Kolanovic said, pointing to beaten-down sectors such as consumer staples and utilities.
Additionally, Kolanovic believes that consumers are becoming dangerously cash-strapped due to the economic environment.
“The job market is still strong. But you start to see the stress in it.” [the] Consumers when you look at the type of defaults in the [credit] Cards and car loans,” he noted. “We still remain somewhat negative.”
Kolanovic, Institutional Investor’s top-ranked equity strategist, started the year with an S&P 500 year-end target of 4,200. The index closed 2022 at 3,839.50.
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