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20% stock market plunge ahead, recession

by Mark Mendoza

JPMorgan’s Marko Kolanovic, a renowned institutional investor, is warning of a potential 20% sell-off in the S&P 500. According to Kolanovic, high interest rates are reaching a breaking point for stocks, and he believes that holding cash at a 5.5% return in money market funds and short-term Treasurys is a crucial protection strategy at this time.

In an interview with CNBC’s “Fast Money,” Kolanovic stated, “I’m not sure how we’re going to avoid [a recession] if we stay at this level of interest rates.” His concern stems from the fact that the S&P 500 closed at 4,258.19 on Thursday and is on the verge of a five-week losing streak. Over the past month alone, the index has dropped more than 5%.

Despite the current weakness, Kolanovic doesn’t view it as a definitive indication of an imminent sharp decline. He suggests that there could still be a near-term bounce, as much depends on the upcoming economic reports over the next few months. He stated, “[We’re] not necessarily calling for an immediate sharp pullback… Could there be another five, six, seven percent upside in equities? Of course… But there’s a downside. It could be 20% downside.”

Kolanovic specifically warns that the “Magnificent Seven” stocks, which include Apple, Amazon, Meta, Alphabet, Nvidia, Tesla, and Microsoft, are particularly vulnerable to significant losses due to their historic gains in the face of high interest rates. These stocks have collectively risen by 83% so far this year, accounting for a substantial portion of the S&P 500’s overall gains.

“If there’s a recession, I think the magnificent [seven]… will catch down where the rest is,” said Kolanovic. He also highlighted struggling sectors such as consumer staples and utilities as potential casualties. Additionally, Kolanovic expressed concern about consumers facing financial strain due to the current economic conditions, citing delinquencies in credit card and auto loan payments.

Kolanovic, who holds the title of Institutional Investor’s top-ranked equity strategist, started the year with an S&P 500 year-end target of 4,200. The index closed 2022 at 3,839.50.

It remains to be seen how these predictions play out in the coming months, but Kolanovic’s warning serves as a reminder for investors to exercise caution and weigh their options carefully in the face of potential market volatility.

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