Odds of an Economic Recession are Rising, But the Stock Market has Already Priced it in and Found its Bottom, JPMorgan Says
The odds of an economic recession in the US are on the rise as recent PMI data shows a decline in business activity, jobless claims begin to rise, and the housing market slows amid high mortgage rates, JPMorgan’s Marko Kolanovic said in a Monday note.
But investors shouldn’t fret because the S&P 500’s year-to-date decline of as much as 24%, combined with negative earnings revisions and a shift in rates markets, means the stock market has fully priced in a mild recession, according to the note.
“Risk markets appear to have largely ignored weak economic data and if anything equity markets rebounded over the past week,” Kolanovic said. “With the peak in Fed pricing likely behind us, the worst for risk markets and market volatility should also be behind us.”
As odds of an economic recession increase, it could open the doors to a more balanced Fed that ultimately leads to fewer interest rate hikes. That’s because recessions, even mild ones, often deliver a deflationary shock, which would be a welcome sign for policymakers who have been seeking to tame 40-year highs in inflation.
“A recession that raises unemployment materially will likely deliver a similarly large disinflationary dividend now,” Kolanovic said.
To position for the potential dynamic of a mild recession that is already priced into the stock market, he believes growth stocks will outperform value stocks as bond yields roll over, commodity prices decline, and the US dollar potentially peaks.
“We believe this is one of the angles that is ushering in the phase of ‘bad data is starting to be seen as good’,” Kolanovic said.
“In all, while recession odds are increasing given weaker economic data, we believe that at least a mild recession is already in the price. We thus remain cautiously optimistic,” he concluded.