Investors taken aback by JP Morgan chief Jamie Dimon’s comment that a “hurricane” will hit the US economy haven’t been paying attention.
So says JP Morgan’s Michael Cembalest, who agrees with Dimon that the Federal Reserve’s attempts to rein in inflation will be economically painful. However, Cembalest’s point is that markets anticipate the bad times.
In each of the six postwar business-cycle downturns, stocks bottomed while the economy was getting worse. The same process is evident today. Major US indices have fallen 20-30 per cent.
The average stock in the Nasdaq, the Russell 1000 Growth index and the small-cap Russell 2000 is down 40-50 per cent. Millennial stocks such as Snap, pandemic stocks such as Peleton, Chinese internet stocks, biotech, speculative tech funds, cryptocurrencies and crypto companies – all have been eviscerated. Does this mean stocks have bottomed?
Probably not, says Cembalest. Stagflation is increasingly likely and many Nasdaq companies still look expensive, so another leg down is possible. Still, selling after the declines that have already happened with the intention of buying back in at lower prices requires “close to perfect timing”. For all the fuss about the looming economic pain, “we’re closer to the end of the market decline than the beginning.”
