Fasten your seatbelts, financial aficionados! JPMorgan’s elite strategists, spearheaded by Marko Kolanovic and Dubravko Lakos-Bujas, are painting a less-than-rosy picture for the stock market in 2024. Picture this: The S&P 500 teeters on the brink of a 10% dip, plunging to an unsettling 4,200. The culprit? A relentless Federal Reserve, holding the reins tight on interest rates until the economy shows signs of fatigue.
What does this spell for investors? In short, a labyrinth with no clear exit. If the economy flexes its muscles with robust data, the Fed plays hardball with high rates, dimming investor enthusiasm. On the flip side, a sluggish economy signals weak earnings and a lackluster stock performance.
The Catch-22: Monetary Restrictions vs. Market Rally
Kolanovic and Lakos-Bujas, in their 2024 outlook note, unravel a classic Catch-22. For the economy to pick up speed or for a sustainable risk rally to take hold, a significant easing of interest rates and a reversal of quantitative tightening are essential. Yet, this easing is unlikely without either a market correction or a dip in inflation, possibly driven by weakened demand. This scenario points to a bumpy ride for the markets in 2024 before any hopes of a recovery.
Recession Warning Signs: Consumer Spending and Yield Curve Inversions
Take a closer look, and you’ll see telltale signs of a looming recession. Households across the U.S. are witnessing their savings dwindle, with excess liquidity plummeting from a peak of $3.4 trillion to a mere $1 trillion. This financial cushion is expected to deflate entirely by mid-2024.
But that’s not all. Rising delinquency rates in auto loans and credit card debts are red flags. Remember, consumer spending is a giant, accounting for about two-thirds of U.S. GDP.
The strategists also spotlight the historical lag between yield curve inversions – often a byproduct of Fed’s rate hikes – and recessions. This lag, spanning 14-24 months in previous downturns, indicates it might be premature to expect a smooth economic landing.
The Stock Market Story: Low Breadth and Tech Dominance
2023’s stock market narrative was one of low breadth and the dominance of a handful of tech giants, the so-called ‘Magnificent Seven’. History tells us that such concentration, last seen in the 1970s, often precedes economic slowdowns. With inflation beginning to ease from its 40-year peak, corporate margins could face significant pressure in 2024.
The Wall Street Divide: JPMorgan vs. Others
JPMorgan’s 4,200 target for the S&P 500 in 2024 is a standout – the lowest on Wall Street. Compare this to Morgan Stanley’s 4,500, UBS’s 4,850, and figures upwards of 5,000 from Goldman Sachs, Bank of America, Citi, and Oppenheimer.
While the broader consensus leans towards a resilient economy, as evidenced by the addition of 216,000 new jobs in December and a steady unemployment rate at 3.7%, there’s a twist. Some market observers echo JPMorgan’s caution, suggesting that strong job data could signal a more hawkish Fed.
Sam Millette from Commonwealth Financial Network notes a significant shift in rate cut expectations following the latest jobs report. Furthermore, Josh Jamner from ClearBridge Investments highlights ongoing downward revisions in job data, historically a precursor to economic slowdowns.
The Bottom Line: Strength vs. Risks
While the economy shows its mettle in key areas, risks to the bull market are lurking, as Kolanovic and Lakos-Bujas warn. The year 2024 stands at a crossroads, with potential paths leading to varied economic landscapes. Investors, brace yourselves for a year where vigilance will be as crucial as optimism.
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