Buffett’s Banker: Markets Could Fall 20% More

How Far Will The Stock Market Fall? In comments made recently, JP Morgan CEO Jamie Dimon expressed his view that the S&P 500 index could fall a further 20 percent before it begins to recover.

 

The well-known banking leader also laid out a case for a recession next year, suggesting that the global economy could have a much harder 2023 than more bullish analysts expect.

 

Here’s what all investors should know about Dimon’s view of the macroeconomic landscape and how they can prepare for further market volatility.

 

In discussing his view on the S&P 500’s future, Dimon noted inflation, the war in Ukraine and rising interest rates as his three top concerns.

 

The Federal Reserve’s quantitative tightening also appeared on Dimon’s list, as it is not yet clear what the effects of such rapid tightening will be.

 

Dimon also discussed a progression of market drops that he argues is typical of a further slide.

 

The first to go, he said, was the IPO market, which has contracted significantly this year. Next was the high-yield market, which is in the process of falling.

 

As more segments of the market fall off, liquidity continues to decline, eventually leading to market-wide losses.

 

His comments also addressed the generally optimistic view taken by bulls who believe that the US stock market is already at or near its bottom. While Dimon acknowledged that consumer spending is up and debt has remained below pre-pandemic levels, he believes that unseen risks in the credit market could soften the economy.

 

Russia’s ongoing war with Ukraine was also mentioned several times throughout the prominent banker’s comments as one of the most likely triggers of unexpected market downturns.

 

A combination of inflation and rising interest rates could be particularly detrimental to companies. Rising inflation tends to reduce consumer demand and increase the overall cost of doing business, thereby softening corporate earnings.

 

Companies are also facing higher borrowing costs due to higher interest rates. This confluence of pressures could send stock prices tumbling, especially if inflation does not abate by next year.

 

Overall, Dimon’s thesis is that blue chip stocks could nearly double their current losses, and the relatively buoyant US economy could turn distinctly more negative. In Dimon’s words, “…the next 20 percent will be much more painful than the first.”

 

In addition to discussing where stocks could go over the coming months, Dimon has also recently commented on the chances of a recession in the US.

 

Expressing a pessimistic viewpoint, the JP Morgan CEO put the chances of a soft landing for the US economy at just 5 percent.

 

Even more ominous was what Dimon described as a 30 percent probability of “something we don’t expect.” These comments provide a good bit of context for Dimon’s stock predictions, as they show that he is expecting a substantial economic downturn.

 

Jamie Dimon has been warning of rising recessions risks for some time. At the same time Dimon predicted a further 20 percent fall for the S&P 500, he put the timeline for a recession at 6 to 9 months. This timeline applied to both a US and a global recession, which Dimon seems to believe would likely occur in conjunction.

In his views, Dimon is supported by analysts at one of his company’s largest competitors, Goldman Sachs. Last month, chief global equity strategist Peter Oppenheimer expressed his view that the S&P 500 could sink another 10 percent if a recession set in.

 

While a bit more conservative than Dimon’s estimate, this clearly shows that the two large banks are looking at the current macroeconomic landscape in very similar ways.

 

If Jamie Dimon is correct, the painful losses investors have suffered so far this year could continue on well into 2023. If this proves to be the case, investors should begin planning today to position themselves for a potential economic downturn.

 

One of the best historical investments when recessions strike is the S&P 500 itself. On average, stocks regain their previous peaks about 27 months after the end of a bear market. By investing in an index of large, stable companies when stocks are down, it’s often possible to earn outsized returns when they begin rising again.

 

Blue chip dividend stocks are another safe haven for investors when the economy turns sour. A stable dividend is an indicator of overall financial health at a company, making it more attractive during hard times.

 

It’s important to select stocks with safe dividends during bear markets, as excessively high dividends could weigh on a company’s finances and ultimately prove too risky.

 

A final piece of conventional wisdom during recessions is that cash is king. In order to buy when stock prices are down, you’ll need a pool of liquid cash to draw from.

 

Owing to high inflation, keeping cash is riskier now than usual. However, high-interest savings accounts and treasury bonds may help to blunt the effects of falling purchasing power.

 

Keeping a healthy cash reserve during a recession is also helpful in case of job losses or other unexpected reductions in income.

 

Ultimately, only time will tell whether Jamie Dimon is correct about the direction of the US economy over the next year.

 

It’s worth noting, however, that Dimon is in agreement with several other large banks and investment analysts in his assessment. Bloomberg, for example, recently raised its predicted recession chances over the next year to 100 percent.

 

While there’s still a chance that the stock market won’t fall further, investors should be prepared for the more bearish scenario.

 

Investing in solid companies with strong business fundamentals and well-managed balance sheets may help your portfolio weather a potential recession.

 

It’s also crucial to remain patient, as selling into a down market is one of the easiest ways to lock in losses and deprive yourself of potential gains when the market recovers.

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