(Bloomberg) - Bank failures, market turmoil and ongoing economic uncertainty as central banks battle high inflation have increased the chances of a “Minsky moment,” according to JPMorgan Chase & Co.’s Marko Kolanovic.
The term, named for the late American economist Hyman Minsky, refers to the end of an economic boom that has encouraged investors to take on so much risk that lending exceeds what borrowers can repay. At that point, any destabilizing event may force investors to sell assets for cash to repay their loans, sparking a market meltdown.
In the past week, investors have contended with several US bank bailouts, market volatility, the collapse of Credit Suisse and the European Central Bank’s 50 basis-point rate hike. Next up is the Federal Reserve’s policy decision on Wednesday and the choices it makes to address both the banking crisis and high inflation.
“Even if central bankers successfully contain contagion, credit conditions look set to tighten more rapidly because of pressure from both markets and regulators,” a team of JPMorgan strategists led by Kolanovic wrote Monday in a note to clients.
JPMorgan expects the Fed to opt for a quarter-point rate hike Wednesday. Its strategists are staying cautious on risk assets for the time being, and sticking with their call that the first quarter will end up being the high point for stocks this year. Still, investors can take advantage of market volatility by selling into potential relief bounces, Kolanovic said.
His next recommendation is to go underweight value and be “defensive in portfolio allocation.”
“This call is predicated on the view that bond yields will move lower along with a likely end of PMI rebound soon, as the impact of past policy tightening starts to take full effect, and the positive offsets (e.g. the cushion of COVID savings and pricing power for corporates) erode,” he said.
Kolanovic, JPMorgan’s chief global markets strategist, was one of the biggest bulls on Wall Street last year, throughout most of the stock-market selloff. His S&P 500 Index price target of 4,800 for 2022 ended up being about 25% higher than where the benchmark finished the year.
He’s since reduced his expectations: His 2023 target for the index is 4,200, about 6.3% above where it closed Monday.
By Carmen Reinicke