Hollis Johnson/Business Insider
- JPMorgan strategists led by Marko Kolanovic say the recent stock rally is "irrational", suggesting the market is downplaying the risk of an economic downturn.
- Even a mild recession would cause equities to tumble by 15% or more, the analysts said.
- A US recession is likely this year as elevated interest rates, a credit crunch caused by the banking turmoil, and geopolitical headwinds weigh on the economy, they added.
The stock market is underestimating the risk of an economic slump this year and even a mild recession would cause equities to tumble 15% or more from current levels, according to JPMorgan.
The US economy will likely tip into recession this year, pressured by the highest interest rates in a decade and a half, a credit slump caused by the recent banking turmoil and persistent geopolitical headwinds, strategists at the bank led by Marko Kolanovic wrote in a note published Monday.
The S&P 500 index of US large-cap shares is up 8% so far this year despite the biggest bank failures since 2008 and the Federal Reserve pushing ahead with its most aggressive interest-rate increases in decades.
"We view the recent rally as irrational and believe it was mainly driven by systematic inflows and short covering, but these drivers are likely running out of steam. We continue to believe a recession is likely this year, as ongoing pressures from high rates/quantitative tightening, credit contraction (following the banking crisis), pressure on carry trades, and geopolitical headwinds permeate through the economy," they wrote.
"On the downside, even a mild recession would warrant retesting the previous lows and result in 15%+ downside," the strategists added.
"We therefore maintain a defensive tilt in our model portfolio this month, unchanged vs. last month, with an underweight in equities and overweight in cash," they wrote.
The JPMorgan strategists also recommended that investors move away from stocks and invest in short-term fixed-income instruments like US Treasury bonds instead, given their higher yields.
"With short term US yields near 5% and equity multiple near 20x, risk-reward heavily favors cash," they wrote.