2024 could be a “catch-22 situation” for markets: JPM
JPMorgan (JPM) is warning investors of a “catch-22 situation” for U.S. markets next year.
According to strategist Marko Kolanovic, a market rally will not be sustainable unless the Federal Reserve cuts interest rates.
“This is a predicament where risk assets cannot experience a sustained recovery at this level of monetary restriction and there is unlikely to be any decisive easing unless risk assets correct (or inflation falls due to weaker monetary policy, for example). “Demand is falling, hurting corporate profits,” Kolanovic wrote in a 2024 forecast report published Friday.
“This would mean that we would need to initially experience some market declines and volatility over the course of 2024 before monetary conditions can ease and a more sustained recovery can occur,” he continued.
Kolanovic, who has been bearish on the rally so far this year, said he prefers bonds and cash over stocks and other risk assets, writing in the report: “In a very optimistic economic scenario, we can see stocks outperform bonds (or cash) .” by about 5%, while in a likely slow-growth or recession environment they could underperform cash by about 20%.
“Regardless of whether there is a recession or not, the ex ante risk-reward ratio of stocks and other risky assets is worse than that of cash or bonds.”
Still, the stock market has continued to outperform in 2023, with the S&P 500 (^GSPC) up 20% year-to-date. The Dow Jones Industrial Average (^DJI) and the tech-heavy Nasdaq Composite (^IXIC) are up about 9% and 38%, respectively, over the same period.
Meanwhile, Treasury yields rose to record highs earlier this fall but have since fallen. The yield on the benchmark 10-year note (^TNX) is currently around 4.27%, after exceeding 5% in October.