The recent prediction of JPMorgan Chase CEO Jamie Dimon that an economic “hurricane” was coming to financial markets, given the Federal Reserve’s loose monetary policy, the government’s fiscal stimulus, and the Ukraine war’s impact on food and energy prices, is looking more prescient every day that inflation ticks higher — and the market descends into bear territory.
At the time of his statement — not even two weeks ago on June 1 — many other Wall Street observers thought he was being alarmist. Among them appear to be the bank’s equity strategist Marko Kolanovic, who said the U.S. stock market is poised for a gradual recovery in 2022, according to Bloomberg.
But Michael Cembalest, chairman of market and investment strategy for J.P. Morgan Asset Management, has taken Dimon’s side. “I agree with him,” Cembalest said in his latest market commentary.
And he has news for people: We’re already in the midst of the hurricane.
Cembalest argued that “investors taken aback by Jamie’s hurricane remark must not be paying attention: a lot of hurricanes have already hit equity markets.” Since Cembalest wrote those words last week, the S&P 500 officially entered bear market territory, with high-flying growth stocks taking the biggest hit. Cembalest calls them the “YUCs (young unprofitable companies) that I’ve been writing about for the last few years.”
He then wrote a eulogy to them, giving their stock price declines from the peak. It’s worth reading, in full:
We have gathered here today to mark the brief life and precipitous demise of many growth stocks. Having slipped the surly bonds of Earth just last year, they have now come asunder.”
Cembalest asked readers to “pray” for hydrogen and other renewable energy companies, which have lost 40 percent from their highs; companies geared to millennials like Snapchat, which last year traded at 40x sales and which now are at 5x sales; “pandemic specials” like Peloton which went from trading at 20x sales to1x sales now, and Chinese internet stocks, which lost 70 percent, matching the NASDAQ decline from 2000 to 2002.
The JPMAM strategist also highlighted SPAC IPOs, for being “an ecosystem of adversely selected generally unprofitable stragglers whose average post-merger performance trails the Russell 2000 by 35 percent, an index which has declined by 30 percent from peak levels” and crypto, whose prices are down 65 percent, even as crypto miners have declined 60 percent, crypto lenders are down 65 percent, and crypto broker-dealers have fallen 80 percent.
“Having fallen far short of everlasting life, may their souls rest in peace,” he concluded.
But Cembalest added that ”there’s an important timing issue for institutional and individual investors to consider. In every business cycle downturn, equity markets lead the economy by several months if not longer. In other words, equity markets anticipate the kind of economic hurricanes that Jamie expects.”
In six major post-war business cycle downturns he pointed to, “equity markets declined, the economic hurricane worsened a few months later, and equity markets bottomed while the economy was still getting worse. That’s what appears to be happening this time as well, at least so far.”