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If weekly jobless claims continue to move upward, that could spark fears about a U.S. recession and weigh down on risk markets, J.P. Morgan’s (JPM) Chief Market Strategist Marko Kolanovic said Monday.
Claims unexpectedly rose 13K to 242K for the week ended June 8, the highest level in nine months and the third straight print showing an increase. “If the US weekly initial jobless claims fail to go back down below the 230k mark and instead they continue to drift upwards, then US recession fears will likely re-emerge unsettling risk markets,” he said.
“Very little” expectations for a contraction are currently priced in across risk assets, the strategist and well-known market bear said. The Russell 2000 index of small-cap stocks (RTY) was implying a 31.4% probability of a recession as of June 13th. While small caps were pricing in a “rather modest” recession probability, the S&P 500 (SP500) was pricing in a 0% probability. JPM provided a chart:
“Benign” inflation prints released last week reinforced the soft-landing scenario for the economy, Kolanovic said. But if the labor market is softening significantly at the same time, that mix could spark worries about a near-term recession, he said.
In outlining its work, JPM gauged recession risk by comparing the current cycle peak to trough declines of equity indexes to those seen during previous recessions. U.S. small-cap stocks (RTY) are a suitable to gauge cyclical risks in part given their interest rate sensitivity as those companies rely more on floating rate debt than other asset classes.
The average peak to trough decline for small caps (RTY)(IWM) has been ~ 33% over the previous twelve recessions, only modestly worse than the 29% rate for the S&P 500 (SP500)(SPY), Kolanovic said.
The Russell 2000 (RTY) has lost 0.2% this year through Monday. The S&P 500 (SP500)(VOO) has risen + 14% and closed at a record high Monday.
