Market turmoil and economic decline, before recovery in 2023, says JPM's Kolanovic

JPMorgan analyst Marko Kolanovic told investors in a research note Wednesday that there is good and bad news for equity markets and risky asset classes in 2023.

Explaining JPMorgan's initial position earlier this year, Kolanovic said that until late summer this year, they thought corporate and consumer resilience would be able to withstand the significant increase in interest rates, wealth destruction, and global geopolitical uncertainty, and as a result, thought buying the pullbacks in risky assets was the right strategy. However, as short-term interest rates moved from 3% to 5% and the prospects for geopolitical de-escalation faded in early fall, JPMorgan abandoned its positive view in the near term.

Kolanavic stated the firm believes that further market and economic weakness may occur as a result of central bank over-tightening.

"The good news is that central banks will likely be forced to pivot and cut interest rates sometime next year, which will result in a sustained recovery of asset prices, and subsequently the economy, by the end of 2023," the analyst explained.

"At that time, markets likely will focus on better economic and corporate fundamentals in 2024 and trade at levels higher than now. The bad news is that this will require central banks (primarily the Fed) to cut interest rates, and in order for that pivot we will need to see some combination of more economic weakness, an increase in unemployment, market volatility, decline in levels of risky assets, and decline in inflation. All of these are likely to cause or coincide with downside risk in the near term," he added.

The analyst declared that JPMorgan's view on risk markets in 2023 consists of 2 periods — market turmoil and economic decline that forces interest rate cuts and subsequent economic and asset recovery.

By Sam Boughedda

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