Market price

There’s an 85% chance of a recession based on stock price action as gloomy talk of a downturn becomes self-fulfilling, says JPMorgan

  • The stock market is currently pricing in an 85% chance of an economic recovery recessionaccording to JPMorgan.
  • Investors and consumers are worried about a looming recession amid rising inflation and higher interest rates.
  • “There appear to be heightened concerns about the prospect of a US recession that could become self-fulfilling if it persists,” JPMorgan said.

The likelihood of an economic recession materializing has jumped to 85% based on current stock market price action, JPMorgan said in a note this week.

The S&P 500 officially entered bearish territory earlier this week and is now down more than 23% year-to-date. According to JPMorgan, the S&P 500 has seen an average decline of 26% during the 11 previous recessions.

That doesn’t mean all the damage to equities is done, as consumers and investors grow increasingly worried about 40-year highs in inflation and rapidly rising interest rates. The Federal Reserve raised interest rates by 75 basis points on Wednesday and is expected to proceed with an interest rate hike of the same magnitude next month.

But gloomy rhetoric about a looming recession could become self-fulfilling if it persists, JPMorgan said, and confidence in the economy often has an outsized influence on the spending habits of consumers and businesses.

“Whether looking at web searches or market prices, there appears to be heightened concern about the prospect of a US recession which, in itself, has the potential to become self-fulfilling,” JPMorgan said.

The bank pointed out that Google search trends for the word “recession” have already passed the peak seen in 2008 and are rapidly approaching the all-time high of March 2020.

Following the Fed’s sharp interest rate hike, a growing concern among investors is the possibility of a policy error by the central bank, according to JPMorgan. A policy error is the idea that the Fed came too late to raise interest rates to control inflation, and in response it may go too far in its tightening plans, which in turn may shatter the economy and lead to future interest rate cuts.

“Not only has the inversion worsened at the front end of the U.S. curve with nearly 100 basis points of policy inversion (i.e. Fed rate cuts) over more than two years after a peak in the fed funds rate of 4% in May 2023, but a forward reversal has also started to appear on the Eurozone curve.In other words, there are also the first signs of an ECB policy error,” the bank said.

But JPMorgan’s quantitative guru Marko Kolanovic still expects the Fed to pull off a soft landing and avoid a recession as the economy continues to recover from the COVID-19 pandemic.

This forecast will fall flat if consumer and business pessimism persists, increasing the chances that investors heading into an economic downturn will become self-fulfilling. And right now, it seems more than likely after US consumer confidence fell to a record low last week.