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Top JPMorgan stock strategist says the bear market lows are likely to be retested soon

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The top stock strategist at JPMorgan thinks investors should stop buying the dip as the impact of Federal Reserve rate hikes is about to hit the economy, corporate earnings and share prices. “We believe that further market and economic weakness may occur as a result of central bank overtightening,” said Marko Kolanovic, the bank’s chief global market strategist, in a note Wednesday. “We believe that previous lows in equity markets are likely to be re-tested as there may be a significant decline in corporate earnings, at a time of higher interest rates (implying lower P/Es and lower prices relative to the 2022 lows); and we are inclined to think that this market decline could happen between now and the end of the first quarter of 2023.” After falling into a deep bear market earlier this year, the S & P 500 has since ticked higher as investors bet that the Fed will soon slow the pace of its rate hikes, relieving pressure on the economy. The benchmark is still down 17% for the year, even with the recent recovery. “Our view on risk markets in 2023 consists of 2 periods: market turmoil and economic decline that will force interest rate cuts, and subsequent economic and asset recovery,” said Kolanovic. “However, the critical parameters of this market path are the depth of the correction that prompts the Fed pivot, and the point in time next year that this pivot happens.” The Fed is set to raise rates again at its December meeting, but expectations are for a smaller hike of just half a percentage point, down from previous hikes of three-quarters of a point. Kolanovic gained a following for telling clients early to buy the pandemic dip in stocks in 2020, arguing correctly that the extraordinary fiscal and monetary stimulus being implemented would turn the market around. But the strategist was too bullish heading into this year. He has correctly advised investors to buy the pullback in the second half of this year, but now is rethinking that view. “Until late summer this year we thought that corporate and consumer resilience will be able to withstand the significant increase of interest rates, wealth destruction, and global geopolitical uncertainty,” he wrote. “As the expected peak in short-term interest rates moved from 3% to 5% (terminal Fed Funds) and prospects for geopolitical de-escalation faded in early fall, we abandoned our positive view in the near term.” Kolanovic is not bullish on bitcoin or its sentiment effects on investors. “The recent crisis of crypto schemes is likely not over, and its end will put additional pressure on risk sentiment and consumers,” the report states.

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