The global banking system is currently facing a crisis, with banks collapsing and markets becoming increasingly turbulent. Inflation is also high, making the situation even more complicated. According to Marco Kolanovic, the chief strategist for global markets at JP Morgan, this environment has increased the likelihood of a “Minsky moment” – the end of an economic tide that encouraged investors to take excessive risks, resulting in loans that borrowers cannot repay.
Kolanovic warns that any event that destabilizes the market could trigger a frenzy, with investors selling assets to repay loans, causing further market instability. The situation has been further complicated by recent events such as the bailouts of US banks, the collapse of Credit Suisse, and a half-percent interest rate hike by the European Central Bank.
Finally, Federal Reserve’s yesterday decision to hike interest rates by 0.25% has passed the point of no return and a “soft landing” of the economy now looks unlikely according to Kolanovic. Market crisis resolution without economic damage will be difficult. He emphasizes that the plane is spinning, with unstable markets, and its engines are about to shut down, referring to bank loans.
Therefore, JPMorgan’s strategists remain cautious about risky assets for now. They anticipate that the first quarter will ultimately be the peak for stocks in 2023. Investors can still take advantage of the volatility in the economy to sell assets and enjoy the temporary lull in the market.
Regarding the investment holdings, Kolanovic advocates being on the defensive side in the distribution of the weight in the investment portfolio. His forecast for the end of 2023 is more balanced compared to the last year’s and he projects 4,200 points for the S&P 500 index, which only 6.3% higher than what the index settled on last Monday.
In conclusion, although the banking crisis and the most recent increase in interest rates have not yet had a significant impact on the economy, they have had an effect on the markets, making them more volatile in recent weeks. Therefore, investors must be cautious and take steps to ensure that they have defensive measures in place to safeguard their investments during these turbulent times.
Photographer: Chris Ratcliffe/Bloomberg