Bob Michele, the chief investment officer for JPMorgan Chase's large asset management division, reflected on the current market and compared it to a misleading quiet period during the financial crisis of 2008. As he pointed out, historic rate-hiking cycles dating back to 1980 have tended to culminate in a recession after 13 months on average. He believes regional banks, commercial real estate, and corporate borrowers with low credit ratings will experience the most distress.
Bob Michele, the chief investment officer for JPMorgan Chase's asset management arm, has warned to be cautious of the stock market's recent recovery after a period of bank collapses and interest rate hikes. Speaking in an interview at the bank's headquarters, he said the situation was reminiscent of the deceptive lull that occurred during the 2008 financial crisis. Both periods involved concerns about the stability of U.S. banks, which led JPMorgan to purchase First Republic last month and Bear Stearns back in March 2008. The markets assumed the crisis had been solved with the policy response, leading to a three-month rally in equity markets.
Currently, the American economy is facing the end of a 15-year-long era of low interest rates and the effect of the Federal Reserve's bond-buying programs being reversed. Despite these factors, the U.S. economy remains strong, as seen in the May payroll data. This has caused a divide between those who believe in a soft landing and those worried of a much worse outcome. Michele is urging caution on the stock market's current recovery, and for investors to be aware of the parallels to 2008.
Michele, having kicked off his career four decades ago, perceives the omens to be obvious: The upcoming few months stand as a serene period before the onslaught. Being in charge of JPMorgan's assets amounting to more than $700 billion and also heading the asset management unit's fixed-income division, Michele recalls that in the prior cycles of raising rates going back to 1980, depressions generally occurred 13 months after the Federal Reserve's last increase in May.
Michele remarked that during the uncertain period just after the Fed has finished raising rates, the economy can still be seen as growing, stating that it would be a miracle if this ended without recession. He predicted that the economy will likely move into recession by the end of the year, however with the remaining effects of Covid related stimulus money, the start of the downturn could be postponed. He expressed his strong belief in a recession a year from now.
Michele's outlook of an impending recession has not been shared by other market watchers. Rick Rieder, head of the BlackRock bond division, declared the economy to be in "much better shape" than the general consensus and reduced the probability of a recession in the next year to 25% when speaking last month. Even among those who predict a recession, few believe it will be as severe as the 2008 downturn. To make a case for a recession, Michele highlighted the Federal Reserve's series of increases in March 2022, which he labeled a 500-basis point "rate shock." Subsequently, the central bank has implemented quantitative tightening by allowing bonds to mature without reinvesting the proceeds, aiming to reduce its balance sheet by up to $95 billion each month. "We're seeing signs that usually accompany a recession or lead to one," he said.
Michele noted that a variety of indications indicated an economic slowdown, such as tightened credit (per loan officer surveys), a rise in joblessness filings, vendors increasing delivery times, a yield curve inversion, and reduced values of commodities.
Michele believes that 3 sectors of the economy stand to suffer the most with this situation: regional banks, commercial real estate and companies with low credit ratings. Government support has helped to relieve some of the pressure on regional banks, but other problems persist; specifically, high interest rates and reduced deposits. Office spaces in downtown areas are also faring poorly, as some property owners are unable to refinance debts due to high rates and, as a result, have been defaulting on their loans. This has had a negative impact on regional banks and Real Estate Investment Trusts.
He noted that "there are a lot of things that evoke 2008," such as overinflated real estate. Nonetheless, many people disregarded this concept until it occurred. In addition, he added, companies with below-investment-grade ratings have benefited from preferable borrowing rates, though they could stumble when seeking to refinance the floating-rate loans. He argued that a lot of businesses are currently taking out loans at a low cost, but that should they try to refinance, the amount could increase severely or they may not be able to, resulting in either restructuring or default.
Michele declared that his investments - comprised of investment grade corporate credit and securitized mortgages - are handled conservatively, given his worldview. He expressed a belief that the portfolios hold the potential to sustain a decline of up to -5% in real GDP. On the other hand, BlackRock's head, Rieder, has a more liberal approach to credit, feeling confident that it would hold up during a soft landing. Despite their bond market rivalry, Michele and Rieder have known each other for 30 years, dating back to when Michele was at BlackRock and Rieder was at Lehman Brothers. Recently, Rieder had ribbed Michele about JPMorgan's five-days-a-week office directive. As the economy's trajectory is still uncertain, it may be that one of them is vindicated as the more prudent investor.
Comments