Investors should avoid stocks and bonds as US economy looks like 2008, top JPMorgan strategist warns

A great JPMorgan Chase & Co. A market strategist urges clients to avoid both bonds and stocks in favor of cash after spotting shades of 2008 in the contemporary US economy.

In his latest note to clients, JPM’s Marko Kolanovic, who earned the nickname „Gandalf” after a series of forecast market calls in 2015, warned that the US economy could slide into a punishing recession as interest rates and bond yields rise. He said stocks or bonds are not safe and asked clients to keep their money and enjoy relatively risk-free 5%+ returns.

Kolanovic said he sees echoes of 2008 in rising bankruptcies and consumer-credit defaults, which coincided with the erosion of the COVID-19 cash cushion that helped shield many from the effects of rising borrowing costs.

But the monetary policy „backward position” that has so far helped the U.S. economy avoid recession is eroding. Now, Kolanovic is focusing on rising borrowing costs, which have risen even larger since the Federal Reserve began raising interest rates last year than they did just before the financial crisis.

Rising rates aren’t the only problem facing stocks and bonds. As Kolanovic sees it, an expected slowdown in fiscal spending could add to the woes of the U.S. economy, while tensions involving China, Russia and other countries create new geopolitical risks that could trigger outbreaks of volatility.

In his view, the headwinds facing stocks have intensified since the start of the year, when the S&P 500 and Nasdaq Composite rallied, and while Kolanovich stood by his bullish stance, the strength of both the markets and the U.S. economy surprised many on Wall Street. .

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While it’s not exactly the same, the economic backdrop to the U.S. years before the financial crisis „rhymes,” Kolanovic said, with rising rates threatening to punish overextended consumers and businesses.

“So the current change in interest rates is five times the 2002-2008 increase. Of course, consumer balance sheets and real estate markets and leverage in the financial sector were high in 2008, but investors should carefully monitor the spread of interest rate shocks across markets and various segments of the economy,” Kolanovic said.

He also cast doubt on the long-term impact of the artificial intelligence craze that has helped boost the S&P 500 and Nasdaq Composite this year, even though most S&P 500 components have been flat or slightly lower since Jan. 1.

Can AI transform the economy and offset the negative impact of inflation and interest rates? We think not. AI can drive up the stock market in a speculative fashion like it did earlier this summer. „Some of the wealth effects of higher stock market valuations may also trickle down into the economy through broader consumer sentiment, which may have introduced additional resilience, but it will dissipate equally quickly,” Kolanovic said.

U.S. stocks ended mixed on Wednesday, with the S&P 500 SPX paring a gain after ending at 4,274.51, while the Dow Jones Industrial Average DJIA fell 68.61 points, or 0.2%, to 33,550.27. The Nasdaq Composite COMP rose 29.24 points, or 0.2%, to 13,092.85.

September marks the 15th anniversary of the collapse of Lehman Brothers, which ushered in the most tumultuous period of the financial crisis. Some on Wall Street have warned that rising bond yields are shining an uncomfortable light on the banking system, following the collapse of Silicon Valley Bank and several other U.S. lenders in March.

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