[NEW YORK] JPMorgan Chase says recession fears in stocks acutely tied to America’s economy have spiked to nearly 80 per cent, while credit investors remain sanguine even as funding stress threatens to build.
The small-cap focused Russell 2000, which has been battered in the recent sell-off, is now pricing in a 79 per cent chance of an economic downturn, according to JPMorgan’s dashboard of market-based recession indicators.
Other asset classes are also sounding alarms: the S&P 500 is pricing in a 62 per cent chance of an economic downturn, while base metals show a 68 per cent chance and five-year Treasuries indicate a 54 per cent chance. By contrast, recession odds in the investment-grade credit market are at just 25 per cent – though that’s still up from zero in November.
“The Russell 2000, which as a more cyclical index should contain more information about the cyclical position of the US economy, prices in an average recession with high probability of almost 80 per cent,” said JPMorgan strategist Nikolaos Panigirtzoglou. “A mild recession is almost 100 per cent priced in.”
Economic sentiment is darkening as money managers and corporate executives struggle to cope with the volatility created by US President Donald Trump’s escalating trade war. Equities on Tuesday (Apr 8) reversed what was on track to be the biggest rally since 2022, after the White House said it would go ahead with tariffs of 104 per cent on China. The S&P 500 fell almost 3 per cent, leaving it flirting with a bear market.
JPMorgan calculates the prospect of an economic downturn by comparing the pre-recession peaks of various classes and their troughs during an economic contraction. One bullish implication for stocks is that the doom and gloom that’s already erased trillions of US dollars from the asset class may have lowered the bar for a rebound fuelled by better economic or policy news.
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On the flipside, corporate bond markets have yet to price in the spiking probability of an economic downturn. If the trade war escalates, a credit drawdown would stress the broader financial system, tighten liquidity and threaten bankruptcies.
The US high-grade corporate bond market reopened on Tuesday for the first time since the tariff announcement last week cratered credit markets.
“Corporate fundamentals are so strong that they make credit investors doubtful of a credit cycle emerging even in a weak GDP growth scenario,” Panigirtzoglou said. “Historically, credit markets were proven right most of the time.”
Economists have raised recession odds across the board. Some 92 per cent of the forecasters who responded to a Bloomberg survey conducted Apr 2 to 3 said the imposition of sweeping levies raises the risk of a US economic downturn over the next 12 months.
JPMorgan’s team of economists, led by Bruce Kasman, hiked the odds of a global recession to 60 per cent last week. The bank’s chief US economist, Michael Feroli, forecasts real GDP growth of -0.3 per cent, down from 1.3 per cent previously. BLOOMBERG
