- Jamie Dimon warns of a possible ‘economic hurricane’
- Fed’s free money party is officially over
- Resetting expectations in terms of returns
Jamie Dimon is the CEO of JPMorgan Chase – America’s largest bank by assets.
He’s also someone who pulls no punches.
Today Dimon was blunt in his assessment; saying US economy is headed for a “hurricane”
“You better brace yourself. JPMorgan is bracing ourselves and we’re going to be very conservative with our balance sheet.”
He echoes the sentiment of my most recent missive; i.e. the downside risks to equities handily outweigh the potential upside reward in the near-term.
For example, I outlined the potential for the S&P 500 to drop a further 15% to test levels of around 3500 this year.
This is closer to a forward PE of ~15x vs today’s ~18x
And I explained earlier this week – between 15 and 16x is more closely aligned with the 10-year yield trading near 3.00%
But Dimon’s stark warning weighed on market sentiment – with all three indices sharply back their earlier gains.
Let’s explore…
‘Free Money’ Party is Over
If there’s a narrative I’ve maintained the past 9+ months or so – it’s that the “free money party” is over.
For example, the Fed’s inflation counter comprises a “1-2 punch” of:
- Normalizing rates over the next 12-18 months (i.e., up to ~3.00%); combined with
- $95B p/mth reduction from their $9 Trillion balance sheet (i.e., “QT”)
As it happens, today marked the first day the Fed allowed existing bond assets to mature – where these securities were not renewed.
The ‘bar tab’ is now officially closed.
Queue the exits.
The Fed’s pivot to combat (sustained) unwanted inflation has resulted in a dramatically different climate for investors.
And if we add to that some of Dimon’s primary concerns around the (i) ongoing war in Ukraine; (ii) slower growth from China and Europe; (iii) global supply chain snarls; and (iv) sticky inflation — it’s easy to envisage the storm he potentially sees coming.
From mine, the hawkish pivot from the Fed (and rise in bond yields) is reason enough for the market to give pause (also given the strong correlation with M2)
As Marty Zweig coined in the 1980s… “don’t fight the Fed”.
However, trying to calibrate this in addition to the global headwinds outlined earlier (not to mention likely Q2 revisions to corporate earnings) is difficult.
But this is exactly what the charts are telling me (more on this in a moment).
Price is truth.
Fundamentally and technically this is a very different market.
For example, we’re reading articles about existing home sales falling; applications for mortgages dropping to their lowest levels since 2018; and major fund managers like Fidelity writing down their private market positions etc.
With respect to the all-important housing market (which is a great barometer for consumer confidence and sentiment):
- Existing-home sales fell for the third straight month to a seasonally adjusted annual rate of 5.61 million. Sales were down 2.4% from the prior month and 5.9% from one year ago; and
- Applications for a mortgage to purchase a home fell 1% last week compared with the previous week, according to the Mortgage Bankers Association. Volume was 14% lower than the same week one year ago.
And here’s Fidelities (not surprising) headline from Bloomberg:
When you think about the psychological impact of these headlines on the market – from mine it’s exactly what the Fed is trying to engineer (as they take “excess” out of the system).
Time to Shift Your Lens
Q4 of last year I decided to take some chips off the table…
At the time, I warned readers of a 10-15% drawdown in the first half of 2022… given how stretched valuations (e.g. 22-23x forward); and the Fed’s (sharp) pivot.
Here’s a chart from December – highlighting the risks using the monthly timeline:
December 2021
Now the Fed indirectly admitted their misjudgment on inflationary risks in November.
From that moment the market paused…
And if we fast forward to March 2022 – the 21-month weekly bullish trend rolled over:
June 2 2022
A couple of important lessons here:
- When a market trades in a bullish trend – dips are typically bought – with rallies are sustained.
- However, when presented with a bearish trend (like today) – strength is usually sold.
That’s not to say we won’t get very sharp rallies.
We will.
But treat any rally with suspicion until proven otherwise.
For example, it’s quite plausible the current rally pushes as high as 4200 to 4300 zone.
From there I think we push lower (not higher).
This means traders and investors need to shift their lens.
This isn’t “buy the next dip” and expect a “10-20%” return in the next few weeks or months.
Whilst that could happen – it should not be the expectation.
In this climate, your timeframes need to be lengthened.
And if you’re unwilling (or at least not mentally prepared) to see your investments fall by say 15-25% in the near-term, this market is not for you.
That’s the kind of volatility to expect.
Three other useful benchmarks to have in mind:
- The average (recessionary) bear market is in the realm of a 25% to 35% drawdown;
- We are coming off a staggering 10-year run of 15% average annualized returns for the broader market; and
- The long-term average S&P 500 annualized market return is 10.5% (inc dividends)
Markets will always work through ‘recessionary’ cycles.
And this is one.
However, buying for the long-term during times of duress (when no-one else wants to) can be extremely profitable.
For example, for those who missed it, I issued this post explaining why it makes sense to buy at peak fear (which we are yet to see).
I think it’s most unlikely anyone can pick a market bottom (that’s just luck). What’s more, drawdowns are part of the game.
Here’s something else which may shift your lens from the greatest investor of all-time:
- Over the 57-years Warren Buffett has run Berkshire – 19.3% of those years saw negative annual returns; and
- Berkshire has underperformed the annual returns of the S&P 500 ~33% of the time
Despite this, Buffett’s average CAGR for 57-years is a staggering ~21% (vs the market 10.5%)
2022 could well be a negative year in terms of returns.
And that’s okay.
Remember, we have just come off a 28% return year.
However, this year could be one where we are gifted with a rare opportunity to buy quality stocks (or the Index itself) at far more reasonable long-term valuations.
Putting it All Together
Dimon’s “economic hurricane” warning opposite the war in Ukraine, rising inflation pressures; interest rate hikes; and Fed quantitative tightening is not surprising.
He added:
Right now it’s kind of sunny, things are doing fine. Everyone thinks the Fed can handle this.
… But that hurricane is right out there down the road coming our way.
We just don’t know if it’s a minor one or Superstorm Sandy. You better brace yourself,” Dimon said, adding that JPMorgan Chase is preparing for a “non-benign environment” and “bad outcomes.”
It’s a fair assessment…
Today things are ‘sunny’ and for the most part – the economy is doing just fine.
For example, the unemployment rate is extremely low; and consumers are cashed up (with some $2 Trillion in savings).
What’s more, corporate credit spreads remain relatively low – suggesting there is ample liquidity with little risk of widespread defaults.
Good news.
But…
We’re seeing the overall narrative change (e.g., early housing market pressure; warnings on revenue and earnings from retailers like Amazon, Target and Walmart; and fund manages writing down the excessive valuations of more speculative investments)
And when I assess the tape (and its direction) – it confirms the risk remains to the downside.