A ‘Feel-Good’ Period Before ‘Inevitable’ US Recession: JPMorgan Investment Officer

Traders work on the floor of the New York Stock Exchange (NYSE) in New York on Dec. 15, 2022. Spencer Platt/Getty Images

Markets could see a rally before an inevitable downturn, said Bob Michele, the chief investment officer of JPMorgan Asset Management, adding that American investors are cleaning out their portfolios with assets that can withstand an economic recession.

“I actually think in the next quarter, we could see risk assets rally. Having been an investor through the financial crisis and looking at that seminal moment when Bear Stearns and JPMorgan combined … the next quarter was great for markets,” the veteran investor said in a Bloomberg interview Friday. “Equities went up 15 to 20 percent. High-yield credit spreads retraced a quarter, and then the bottom fell out.”

“You could have a feel-good period, and then the reality of the cumulative and lagged catch up, and slow the economy down.”

When the interviewer asked if investors could lean into a short-term risk rally, Michele said, “Absolutely not.”

“If we’ve been taught anything this past month, you may see it coming, you may not. You don’t know where exactly it’s going to hit, but once it hits, whatever you own, you own, and you have to hope that you own the stuff that recovers.”

“We think recession is inevitable by the end of the year.”

As to the nature of the recession, he replied: “It’s the central banks and the aggressive amount of tightening they’ve done, and it’s not just the rate hikes—it’s also quantitative tightening. There is a reverse multiplier for that, and that’s sucking credit out of the system.”

In another Bloomberg interview on March 15, Michele said, “There was tremendous liquidity sloshing around in the system, that’s being taken out. We always knew there would be a hard adjustment, but now it’s starting to get painful.”

Because there’s a lot more “consolidation” and “pain” yet to come, “you put your money into the highest quality assets you can find, whether it’s government bonds or high-quality corporates and securitized credit.”

Signs of Recession

For calling a recession, the economy needs to be in contraction for at least 6 months, along with a host of other factors like a slowdown in consumer spending and manufacturing activity, a surge in unemployment, and an inversion of the yield curve.

According to economic tracker the Conference Board, its Consumer Confidence Index increased in March to 104.2, a slight uptick from February’s 103.4.

“While consumers feel a bit more confident about what’s ahead, they are slightly less optimistic about the current landscape. The share of consumers saying jobs are ‘plentiful’ fell, while the share of those saying jobs are ‘not so plentiful’ rose,” said Ataman Ozyildirim, senior director at the organization.

However, the Conference Board Leading Economic Index (LEI) for the United States fell by 0.3 percent in February 2023 to 110.0, after declining by 0.3 percent in January.

“The LEI for the US fell again in February, marking its eleventh consecutive monthly decline,” said Justyna Zabinska-La Monica, senior manager of business cycle indicators at The Conference Board.

Over the six-month period from August 2022 to February 2023, the LEI fell 3.6 percent, a steeper rate of decline than its 3.0 percent contraction over the prior six months.

Persistently Gloomy Outlook

The manufacturing sector registered a business contraction in February for the fourth consecutive month, according to the latest Manufacturing ISM Report On Business.

“The Employment Index dropped into contraction territory, registering 49.1 percent, down 1.5 percentage points from January’s 50.6 percent,” said ISM chair Timothy Fiore.

“Demand eased, with the (1) New Orders Index contracting at a slower rate, (2) New Export Orders Index still below 50 percent but continuing to improve, (3) Customers’ Inventories Index remaining at ‘too low’ levels, a positive for future production and (4) Backlog of Orders Index recovering for a third month but still in moderate contraction.”

The United States is expected to enter into a recession by the end of 2023, said the semiannual National Association for Business Economics (NABE) Economic Policy Survey, which published responses from 217 members in a March 27 report.

“More than half of NABE Policy Survey panelists expect a recession at some point in 2023,” said NABE President Julia Coronado.

“However, only 5 percent believe the U.S. is currently in a recession, far fewer than the 19 percent who held this view in the August Policy Survey,” Coronado said.