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Hollis Johnson/The Insider
- A lot can go wrong in the stock market that investors are not fully appreciating.
- So according to Marko Kolanovic, JP Morgan’s quant chief, who is worried about higher interest rates.
- “We think now there is a higher likelihood of a crisis in the next six to 12 months,” he said.
The combination of higher interest rates and the stock market’s strong year-to-date rally is alarming JPMorgan’s chief global markets strategist.
In a Monday note, JP Morgan’s Marko Kolanovic said a crisis is brewing in financial markets, and it could cause a lot of pain over the next six to 12 months.
Kolanovic has been bearish throughout 2023 due to rising geopolitical tensions between Russia’s war with Ukraine and China’s strained relations with the US. Additionally, he highlighted that although there are certain effects, the effect of high interest rates in the long run is ultimately negative for asset prices and the wider global economy.
“As both the premises for our cautious outlook (rates and geopolitics) have become more negative over the past few months, while positions and valuations have risen, we now think there is a higher likelihood of a crisis in the next six to 12 months.” The severity of which may exceed market participants’ estimates,” warned Kolanovic.
The Fed’s tighter monetary policy is having a negative impact on consumer credit, increasing the delinquency rate. Meanwhile, commercial real estate has been hit hard by the work-from-home trend, just before the sector will have to refinance loans at much higher borrowing costs.
According to Kolanovic, these effects of higher interest rates will ultimately increase market volatility and negatively impact employment.
And the AI-fuelled rally in the tech sector isn’t helping the situation, as it will likely prove fleeting for investors. He said expectations that AI will transform the US economy in the short term are “unrealistic”.
For Kolanovic to be more bullish on the stock market, he needs to see two things happen — and they have nothing to do with the promise of AI. Instead, he wants to see interest rates drop around the world as well as geopolitical tensions in Russia and China ease.
But Kolanovic isn’t holding his breath.
“Our negative market outlook is based on seeing a low probability of any of these scenarios being realized in the near future – in short, we think that developments may need to get worse before they get better,” he added. They said.
Read the original article on Business Insider
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