While central bank warnings of steep interest rate increases have spooked some investors, JPMorgan is sanguine.
Hawkish comments about interest rates by central banks around the world have some investors scared that economies and financial markets are headed for a downturn.
But JPMorgan strategists, led by Marko Kolanovic, aren’t so pessimistic.
“We maintain that economic data and investor positioning are more important factors for risky asset performance than central bank rhetoric,” they wrote in a commentary.
“And the data appear to be increasingly supportive of a soft landing (rather than global recession), given moderating inflation and wage pressures, rebounding growth indicators, and stabilizing consumer confidence.”
U.S. consumer prices rose 8.3% in the 12 months through August, decelerating from the 8.5% increase for the 12 months through July.
And the U.S. government reported Sept. 15 that retail sales climbed 0.3% in August from July.
Tailwinds for Stocks
“Our expectation that the global economy will stay out of recession, along with increasing fiscal stimulus (e.g., in China, and energy support in Europe) and still very low investor positioning and sentiment, should continue to provide tailwinds for risky assets,” the strategists said.
That will override the “more hawkish central bank rhetoric recently,” they said. As a result, “we maintain a pro-risk stance in our model portfolio this month.”
Recent geopolitical developments, such as deteriorating prospects of an Iran nuclear deal and of G-7 progress toward Russian oil price caps, “should be bullish for energy,” the strategists said.
“But prices have yet to respond.” U.S. oil prices have dropped 28% in the past three months.
“We advocate buying the dip in energy and keep our aggressive overweight rating in commodities and commodity-sensitive assets, given our super-cycle thesis, and as a hedge for inflation and geopolitical risks,” the strategists said.
They also remain overweight stocks in general. Among equity areas they like are cyclicals, small caps and emerging markets, including China. They aren’t interested in expensive defensive stocks.
Dalio’s Take: Less Enthusiastic
Meanwhile, Ray Dalio, founder of Bridgewater Associates, the world’s biggest hedge fund manager, isn’t as enthusiastic as the JPMorgan strategists
Looking at inflation, “my guesstimate is that it will be around 4.5% to 5% long-term, barring shocks (e.g., worsening economic wars in Europe and Asia, or more droughts and floods),” Dalio wrote in a commentary on LinkedIn.
Dalio forecasts a range between 4.5% and 6% percent for long- and short-term nominal bond yields in coming years. Given the federal government’s hefty debt load, he thinks yields must rise to the higher end of that range.
The yield increase implies “a significant fall in private credit that will curtail spending,” Dalio said. “This will bring private-sector credit growth down, which will bring private-sector spending and, hence, the economy down with it.”
The rate rise will produce a 20% drop in stock prices, Dalio predicted. That too will depress the economy, he said.
