JPMorgan’s Chief Market Strategist, Marko Kolanovic, is sounding a cautionary note for US stock investors in the coming year, presenting what he deems a lose-lose situation. In a recent advisory to clients, Kolanovic expressed skepticism about the sustainability of potential rallies in equities and other risk assets without substantial interest-rate cuts by central banks. He asserted that such cuts are unlikely unless the markets experience significant declines or the economy falters. In light of this scenario, Kolanovic recommended investors opt for cash or bonds over stocks.
Describing the situation as a “catch-22,” Kolanovic emphasized the need for market declines and volatility in 2024 before monetary conditions ease and a more sustainable rally becomes possible.
Kolanovic, who has maintained a bearish stance throughout this year’s stock rally, reiterated his defensive position, highlighting that bond yields present a “high performance hurdle rate” for other assets and strategies. While Treasury yields have generally retreated, Kolanovic estimated that even in the most optimistic economic scenario, equities would outperform bonds or cash by only about 5%. In a scenario of declining growth or a recession, he suggested that equities could underperform cash by around 20%.
“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,” Kolanovic stated.
Despite the resilience of the economy and the Federal Reserve’s aggressive interest-rate increases earlier this year, Kolanovic’s bearish call for 2023 did not materialize, with the S&P 500 Index up 19%. He had reduced his equity allocation in the past year due to a deteriorating macroeconomic outlook.
In contrast to some Wall Street firms predicting all-time highs in 2024, JPMorgan’s strategists, including Kolanovic, have maintained a gloomier outlook, forecasting the S&P 500 dropping to 4,200 by the end of next year, approximately 8% lower than its current trading level. Kolanovic warned that the interest-rate shock of the past 18 months would eventually catch up with the economy and markets.
“Overall, we are not positive on the performance of risky assets and the broader macro outlook over the next 12 months,” Kolanovic emphasized, reflecting the firm’s steadfast stance amidst the US equity market’s unexpected advance this year.
