The S&P 500 now implies an 85% chance of a US recession amid fears of a policy error by the Federal Reserve, according to JPMorgan Chase & Co strategists.
The warning from quant and derivatives strategists is based on the average 26% decline for the S&P 500 during the past 11 recessions and follows the US benchmarks collapse into a bear market amid concerns about surging inflation and aggressive interest rate hikes.
In all, there appear to be heightened concerns over recession risk among market participants and economic agents, which could become self-fulfilling if they persist prompting them to change behavior, e.g. by cutting investment or spending, the strategists led by Nikolaos Panigirtzoglou wrote in a note. Market concerns of a risk of policy error and subsequent reversal have increased.
US stocks rallied on Wednesday after the Fed raised rates by 75 basis points, in line with expectations, but the positive mood quickly evaporated. Investor attention turned to the risks to growth as Chair Jerome Powell effectively admitted that a downturn was possible.