Recession, stock market, home price outlook from strategist JPMorgan

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  • JPMorgan Private Bank’s Chief Strategy Officer, Tom Kennedy, believes the United States can still avoid a recession.
  • Kennedy is confident in the Federal Reserve’s ability to cool inflation without freezing growth.
  • Below is Kennedy’s outlook for the housing market, along with some of his investment ideas.

It’s been a horrific five and a half months for stocks as investors begin to realize how destructive historically high inflation could be to the economy.

Price spikes have weighed on corporate earnings and caused the


Federal Reserve

put in place stricter financial conditions. This unpleasant combination has led JPMorgan Private Bank to cut its economic growth outlook for 2023 as the post-pandemic recovery begins to falter.

But Tom Kennedy, who is JPMorgan Private Bank’s chief investment strategist, told Insider in a recent interview that he’s still bullish on stocks because he thinks there’s still about a two-thirds chance United States avoid a


recession

.

Like many of his Wall Street peers, Kennedy entered the year bullish. He thought the S&P 500 would extend its four-year winning streak by rising 5% to 5,000 in 2022. Kennedy and his team were forced to recalculate earlier in the year, but their revised end-of-year price target The year of 4,650 still suggests the index is up about 19% from current levels.

“We’re keeping that number, for now, in our base case,” Kennedy told Insider. “But clearly see a downward bias due to the Fed’s inflation drive and what will be needed to control inflation growth in America.”

Kennedy continued: “If interest rates have risen enough, the Fed can still stage a soft landing. But the more likely scenario after this one is that they end up getting too tight, which in the history is usually what has caused recessions, ex-financial crisis.”

Why the United States will likely avoid a recession

For the United States to avoid a second economic slowdown in three years, the Fed must put a brake on inflation without stifling growth entirely, Kennedy said. A so-called soft landing is still possible as there is evidence that the US central bank’s credibility is “still intact” despite the tsunami of criticism it has faced, the chief strategy officer said.

“First and foremost, it’s how people trade inflation expectations,” Kennedy said. “The first chart the Fed will look at at every meeting is whether the market sees them as credible, and they’ll start with five-year expectations first, then they’ll talk about surveys for three-year inflation expectations. . .”

He continued, “These are high, but they don’t suggest the Fed is losing control or people are saying, ‘There’s no way they’re getting inflation under control.'”

Market long-term inflation expectations are still close to the Fed’s long-term 2% target, Kennedy noted. Economists consider a moderate level of inflation to be healthy because it is a sign of a growing economy. Markets trust the US central bank to fight inflation, as does Kennedy.

“The Fed has the ability to control that because inflation doesn’t run away from them,” Kennedy said.

But just because Kennedy is skeptical of an impending recession doesn’t mean he thinks the United States is completely clear.

In one of the most obvious signs of inflation, house prices soared as strong demand, limited supply and the ability to borrow money for next to nothing caused a unique surge in a generation. Kennedy is among those speculating that the trend is not sustainable, especially as interest rates rise.

“Something will give,” he said. “I’m not calling a housing market crash, but this world needs to slow down.”

The chief strategist added: “You should either see house prices go down or the number of houses sold. But either way, this economic impact will slow growth.”

This view matches the majority of the 32 experts polled by Insider on whether a property market bubble will burst. About two-thirds of those polled said there would not be another financial crisis-type crash, but there was broad consensus that the housing market was going to cool down.”

A slowdown in the housing market may seem desirable, given the high level of inflation and the fact that housing affordability has been “as bad as it was in the years before the great financial crisis” , in the words of Kennedy. But, as the strategist noted, a sharp reversal in home price values ​​will hurt growth while making millions of Americans less wealthy and raising fears of a recession.

Investing ideas as the US avoids a slowdown

Although Kennedy’s main focus is on developing opinions on the future of markets and the economy, the chief strategy officer also shared some insights on how to manage a portfolio.

Earlier this year, Kennedy said JPMorgan Private Bank advised investors to maintain a risk-oriented mindset by remaining overweight equities and underweight fixed income. Both asset classes have performed poorly so far this year, with the economy showing signs of weakness.

And while Kennedy still believes the United States will avoid a recession, he acknowledged that the odds of a downturn are significantly higher than they were. This is why he favors US equities over their international counterparts while favoring fixed income securities.

“Our most compelling idea right now is to talk about simple, unsexy fixed income,” Kennedy said. “The odds of a recession are increasing, our clients are underweight, and you can finally get yield and diversification benefits in the liquid market.”

The strategist also said the following about bonds: “While the odds of a recession will increase, as rates have risen they are becoming more and more attractive.”

According to Kennedy, the best opportunities in the bond market are in commodities such as investment grade coupons and municipal debt. Riskier high-yield bonds may be valuable in a portfolio as a replacement for stocks, but would hurt in a recession, Kennedy said.

“As an outright yield opportunity, I think you’re better off at the core,” Kennedy said.

Investors who are willing to take on more risk to seek higher yield may consider bank preferences or extended credit ideas instead, as yields have hit the high numbers, Kennedy said.

“I can replace higher risk equity exposure with lower risk,


volatility

ideas, while earning an equity-like return,” Kennedy said. “That’s pretty much the name of the game.”

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