JP Morgan Analyst Raises Concerns About Potential ‘Stagflation’ in the US Economy
An analyst from JP Morgan Chase has issued a warning about the possibility of the US economy entering a period of ‘stagflation’. Marko Kolanovic, the chief market strategist at JP Morgan, expressed concerns about the current market optimism and the risks associated with it. Despite recent record highs in US stocks, Kolanovic believes that the momentum may not continue and that the country could be facing a scenario similar to the stagflation experienced in the 1970s.
The Federal Reserve’s decision to keep interest rates high, coupled with higher-than-anticipated inflation numbers for January 2024, has raised concerns among analysts. Previously, banks like Goldman Sachs and surveys of CEOs had predicted that the US economy would avoid a recession. However, Kolanovic’s warning suggests that elevated inflation, combined with the lingering effects of the COVID-19 pandemic and related restrictions, could lead to an economic downturn.
Kolanovic’s note highlights the potential challenges of controlling inflation in an environment where stock and crypto markets are adding trillions of dollars in paper wealth. He questions whether these developments, along with tightening aspects of central banks’ selling assets neutralized by Treasury issuance, can effectively lower inflation. The rapid growth of tech companies and the doubling of the crypto market since last fall also raise concerns about inflationary pressures.
The analyst also points to high levels of immigration and increased government spending as factors that could contribute to rising inflation. With the Nasdaq index experiencing a significant rally, tight labor markets, and government fiscal spending, it is not surprising that inflation may stop declining or even rise further, according to Kolanovic.
Another risk identified by Kolanovic is the potential impact of geopolitical developments and the upcoming US presidential elections on global trade. He predicts that there will be no market upside related to the election outcome, as it will either result in a status quo or increased uncertainty, particularly regarding global trade and geopolitical tensions. The significant increase in investor positioning presents an additional headwind for the market.
Investors who dismiss the possibility of a recession or stagflation may be basing their optimistic market outlook on the assumption that corporate profits will accelerate. However, reports suggest that this expectation may be unfounded, as corporate profit margins appear to be peaking out and historically, profit margins tend to decline before an economic downturn.
JP Morgan CEO Jamie Dimon has also expressed concerns about the similarities between the current economic situation and the 1970s. He points to large fiscal deficits, extensive government spending, changes in global trade, and inflationary factors associated with the Biden administration’s policies as potential causes for stagflation. Dimon warns that the economy could experience either a mild or severe recession.
However, the Conference Board recently abandoned its prediction of a recession in the US economy. While their Leading Economic Index indicates that economic output may remain stagnant in the coming months, it does not signal an immediate recession. The index, which is meant to forecast future economic activity, saw a decline in January but also had positive contributors over the past six months.
In conclusion, concerns about potential stagflation in the US economy have been raised by JP Morgan analyst Marko Kolanovic. He warns of excessive market optimism, high inflation numbers, and factors such as immigration and government spending that could contribute to rising inflation. The upcoming US presidential elections and geopolitical developments also present risks for global trade. While some investors remain optimistic about corporate profits accelerating, Kolanovic suggests that corporate profit margins are peaking out and historically decline before an economic downturn. However, the Conference Board’s Leading Economic Index does not currently predict a recession, although economic output may remain flat in the coming months.
