On Monday Eastern Time, Marko Kolanovic, Chief Global Strategist at JPMorgan Chase, released a report stating that the US stock market may exhibit more fragility and volatility in 2024, and investors should be mentally prepared for a risk return environment that is worse than expected.
He mentioned that in the first half of this year, the market's optimistic expectations of a decline in US inflation may be challenged, and geopolitical tensions may deepen risk aversion.
The US stock market has clearly overbought
Kolanovich wrote in his report, "After the rebound of US stocks and bonds at the end of last year, the market has experienced overbought behavior, and market sentiment is in a region of complacency."
He mentioned that the US stock RSI index is in a high range of overbought, the bull bear index is rising, the panic index (VIX) is approaching a low point, credit spreads are tightening, and valuations are too high, all of which are clear signals of market overbought.
"Therefore, we have seen that the rebound trend of the US stock market at the end of last year has partially reversed at the beginning of this year, due to increased data flow and a resurgence of geopolitical risks," wrote Kolanovich.
In the first week of this year, the S&P 500 index fell by 1.52%, reversing the previous trend of nine consecutive weeks of gains. The Nasdaq index also fell by a cumulative 3.25% in the first week of the year, while the Dow Jones index fell by a cumulative 0.59%.
The downward trend of inflation in the United States may have begun to stop
The report states that although a decrease in inflation is beneficial to the market, the downward trend of inflation in the United States may have started to slow down or even stopped as commodity prices face new upward pressure.
This is partly due to the impact of conflicts in the Red Sea region on commercial cargo ships, which is driving up shipping costs. At the same time, the low water level of the Panama Canal has caused serious traffic delays.
Xiaomo predicts that these risks mean that the core consumer inflation rate (CPI) in the United States will remain stable at 3%, still higher than the Federal Reserve's target of 2%.
Under this expectation, the Federal Reserve's interest rate cut this year may be lower than the market's general expectation. At present, the CME Federal Reserve observation tool shows that the market expects the Federal Reserve to cut interest rates by approximately 150 basis points this year.
The positive expectations of the market may contradict themselves
Xiaomo said that US stock investors may also have to reassess their risk preferences, as the low yields in the bond market may actually be a signal of future low growth. As US economic activity slows down, pricing power weakens, and profit margins shrink, the weakening of US stock company profits will prove this.
Xiao Mo wrote in the report:& Quota; Most importantly, risk assets have begun to fully digest this macro expectation: the Federal Reserve is expected to relax policies to reduce inflation, while the United States can still maintain strong economic growth and sustained record breaking profitability.
Kolanovich emphasized that this macro expectation combination may eventually contradict each other - for example, in the context of strong US growth, the Federal Reserve may not significantly relax monetary policy - and once market expectations are difficult to meet, it will ultimately damage the returns on risky assets.