Investors might panic as inflation falls further — here’s the stock-market call of JPMorgan’s resolute bear

What investors didn’t want to see was a robust NFP report with accelerating wage growth that may bolster inflationary pressures, thereby keeping the Fed’s rates high for longer. Neither desired was a really bad reading that suggests if the central bank does have to cut borrowing costs it’s because the economy is falling out of bed with a bump.

One of Wall Street’s biggest bulls thinks the market can navigate that middle ground. Fundstrat’s head of research Tom Lee says the S&P 500 can reach 5,200 by the end of next year as falling inflation sees interest rates move lower, while the economy “probably” avoids a recession.

Lee’s antithesis is JPMorgan’s chief market strategist Marko Kolanovic, who’s been bearish on stocks for much of the year. He agrees with Lee that interest rates will likely fall in 2024 as the economy slows — the 10-year Treasury yield may fall to 3.75%, he reckons — but he warns it will reflect a scenario that is bad for equities.

“Should investors and risky assets welcome an inflation decline and bid up bonds and stocks, or will the fall in inflation indicate that the economy is sliding towards a recession? We think that the decline in inflation and economic activity that we forecast for 2024 will at some point make investors worry or perhaps even panic,” he told clients in a note on Thursday.

The damage done to the economy by the Fed’s rate hiking campaign is starting to show up, says Kolanovic, with the market too complacent amid a backdrop of declining consumer strength and increased credit stress, as shown in the charts below.

In essence, Kolanovic reckons that stocks and other risk assets won’t be able to maintain a bullish run without substantial interest-rate cuts by central banks, and that is only likely to occur if markets fall substantially or the economy falls sharply.

“This is a catch 22 situation, in which risk assets can’t have a sustainable rally at this level of monetary restriction, and there will likely be no decisive easing unless risky assets correct (or inflation declines due to, for example, weaker demand, thus hurting corporate profits),” says Kolanovic.

“Overall, we are not positive on the performance of risky assets and the broader macro outlook over the next 12 months,” he adds. As risk appetite fails, currency carry trades may be reversed (witness the recent rebound in the Japanese yen
USDJPY,
+0.23%
) while precious metals
GC00,
-0.67%
have structural tailwinds and would benefit from a risk-off sentiment and subsequent easing of monetary policy.

In summary, Kolanovic says investors should choose cash or bonds over stocks, which are trading on earnings multiples that are too high. “In a very optimistic economic scenario, we can see equities outperforming bonds (or cash) by about 5%, while in a likely environment of declining growth or a recession, they could underperform cash by about 20%.”

Markets

U.S. stock-index futures
ES00,
-0.19%

YM00,
-0.15%

NQ00,
+0.41%
are lower after the stronger than forecast jobs data, with benchmark Treasury yields
BX:TMUBMUSD10Y
moving higher. The dollar
DXY
is up, while oil prices
CL.1,
-0.21%
rally and gold
GC00,
-0.67%
hovers at $2,046 an ounce.

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The buzz

The nonfarm payrolls report, released at 8:30 a.m. Eastern, showed the U.S. economy created a net 199,000 jobs last month, up from 150,000 in October, and more than the forecast of 190,000. The unemployment rate moved down to 3.7%, against expectations it would stay the same at 3.9%, and average hourly wages rose by 0.4%, up from 0.2%.

Other U.S. economic data due on Friday includes the preliminary reading on December consumer spending, due at 10 a.m.

Apple
AAPL,
-0.31%
is planning a massive expansion of iPhone manufacturing in India, according to multiple reports.

The U.K.’s competition regulator is investigating whether Microsoft
MSFT,
+1.22%
has control over OpenAI.

Shares of RH
RH,
-2.79%
are falling more than 7% in premarket trading after the home furnishings company formerly known as Restoration Hardware swung to a surprise quarterly loss and said that promotions will pressure its bottom line amid a “frozen” housing market.

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The chart

Market watchers will know that big tech has outperformed this year, with a handful of constituents pushing the S&P 500 up 19.4% while the Dow Jones Industrial Average has gained just 9%. But as the chart below from DataTrek shows. the Dow’s underperformance is at extremes.

“Either tech is overextended here and non-tech equities should shine over the next year, or tech has become so superior that the outlook for non-tech names looks structurally grim over the longer-run,” says DataTrek’s Jessica Rabe.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

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