JPM Cuts Risk Further as 2023 Approaches, Sees 12Q Lows Retested By Investing.com

By Senad Karaahmetovic

JPMorgan is becoming increasingly cautious on stocks as 2023 approaches given the rise recession risks. The bank’s top equity strategists predict greater market weakness next year due to excessive central bank tightening.

Strategists further reduced risk, given the weak outlook for markets out to 2023.

“We are moving our equity allocation from OW to a moderate UW, reducing risk in commodities (while maintaining a large OW) and funding them by increasing our allocation to corporate bonds and cash. In the credit portfolio , we are going OW HG vs HY, and in Commodities we are covering our previous UW in precious metals,” they wrote in a client note.

Strategists also expect this year’s lows to likely be retested “early next year”, spurred by a pullback in risk assets. They believe that central banks will further fuel market volatility before being “forced to reverse course”.

“Our view is that central banks are likely to signal interest rate cuts over the next year, leading to a sustained recovery in asset prices by the end of 2023, and the rest of the economy. However, for this pivot to take place, we will first have to see a combination of economic deterioration, rising unemployment, market volatility, falling levels of risky assets and lower inflation,” they wrote in a note.

This type of environment presents short-term downside risk. Strategists see a better environment for equities in the second half of 2023, when markets should begin to focus on better economic prospects and corporate fundamentals, and eventually trade higher.

Until then, the equity market is expected to trade lower from current levels, a view also shared by equity strategists at Morgan Stanley and Bank of America.