JPMorgan analysts offered fresh comments about the outlook for financial markets for the next year. The famous strategists anticipate “another challenging year for market participants.”
JPMorgan economists anticipate a softening in both inflation data and economic activity in 2024. The question arises whether investors and risky assets should welcome a decline in inflation, leading to increased demand for bonds and stocks, or if the decrease in inflation signals a potential economic recession.
“We think that the decline in inflation and economic activity that we forecast for 2024 will at some point make investors worry or perhaps even panic,” analysts wrote in a note.
The primary concern stems from the interest rate shock observed over the past 18 months, which is anticipated to have a negative impact on economic activity. Moreover, geopolitical developments pose challenges, affecting commodity prices, inflation, global trade, and financial flows.
Despite these factors, the bank notes that valuations of risky assets are, on average, expensive.
The bank’s forecasts suggest that the Federal Reserve could begin easing in the second half of 2024, potentially at a pace of 25 basis points per meeting.
In the scenario of a gradual economic slowdown, the decline in bond yields is expected to be led by the midsection and eventually the front end of the yield curve.
The forecasts also indicate that the U.S. 10-year note yield could decrease to 3.75% over the next year, with the possibility of further decline if the economy enters a recession.
Along these lines, JPMorgan sees the case for a stronger dollar.
“Currency carry trades, that attracted significant inflows and performed very well this year, would likely give back some of this performance, or potentially unwind in a sharp risk-off scenario,” analysts added.
“In commodities, precious metals have structural tailwinds and would benefit from a risk-off sentiment and subsequent easing of monetary policy. There is significant value in energy, but economic weakness may interfere with geopolitical and structural tailwinds.”
JPMorgan highlights the difficulty of envisioning an economic acceleration or a sustained risk rally without a substantial decrease in interest rates and a reversal of quantitative tightening.
“This is a catch22 situation, in which risk assets can’t have a sustainable rally at this level of monetary restriction, and there will likely be no decisive easing unless risky assets correct (or inflation declines due to, for example, weaker demand, thus hurting corporate profits),” analysts added.
“This would imply that we would need to first see some market declines and volatility during 2024 before easing of monetary conditions and a more sustainable rally.”
All-in-all, JPMorgan holds a cautious outlook on the performance of risky assets and the broader macroeconomic environment over the next 12 months.
“Regardless of whether a recession happens or not, ex-ante, the risk-reward in equities and other risky assets is worse than in cash or bonds.”