JPMorgan (NYSE:JPM)'s quant chief, Marko Kolanovic, expressed concerns in a note on Monday about the possibility of a financial crisis in the next six to twelve months, fueled by rising interest rates and geopolitical tensions. His bearish outlook throughout 2023 has been driven by these factors, along with the ongoing war between Russia and Ukraine, and strained relations between China and the US.
Kolanovic noted that the combination of high interest rates and a robust year-to-date stock market rally is setting off alarm bells. He pointed out that while there are certain lagging effects, the impact of higher-for-longer interest rates is ultimately detrimental for asset prices and the broader global economy.
The tightening of monetary policy from the Federal Reserve is having negative implications on consumer credit, as delinquency rates have started to rise. Furthermore, commercial real estate has been severely affected by work-from-home trends, just as the sector faces refinancing debt at considerably higher borrowing costs. Kolanovic suggested that these knock-on effects from higher interest rates could eventually lead to increased market volatility and negatively impact employment.
Kolanovic also expressed skepticism about the recent AI-driven rally in the tech sector. He argued that expectations of AI transforming the US economy in a short period of time are "unrealistic," and this could prove to be fleeting for investors.
In order for Kolanovic to adopt a more bullish stance on the stock market, he would need to see two significant changes: a worldwide decrease in interest rates and a de-escalation of geopolitical tensions in Russia and China. However, he is not optimistic about these scenarios materializing in the near term. "Our negative market view is based on seeing a low chance of either of these scenarios materializing near term - in short, we think that developments may first need to get worse before they get better," Kolanovic said.
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