So, of course, the timid market drew hope from Dimon’s summary of economic conditions.
First, Dimon emphasized that the US economy was very strong, while the consumer was still very healthy, as evidenced by JPMorgan’s improving financial outlook. But he also acknowledged that threats to economic growth were growing and that there was a potential recession.
“Strong economy, big storm clouds,” he said, summarizing his vision.
“I call them storm clouds because they are storm clouds. They can fly. If it was a hurricane, I’d tell you – or a tsunami, like we had in ’07 or ’08.”
And just like that, Monday night’s mini-relief rally in US markets was gone.
But Dimon’s comments deserve a little more unpacking. The banking veteran’s main point was less about where the US and the global economy might be headed and more about the world facing a range of conditions it has never seen before.
The strong economy, he explained, was “driven by monetary and fiscal stimulus like you’ve never seen before…But that strong economy is being countered by two opposing forces, both of which you’ve never seen before.”
The combination of high inflation and quantitative tightening, Dimon said, was highly unusual. On this was a war in Ukraine, which had led to a humanitarian crisispushed up the prices of oil, wheat and other commodities, yet can have an unpredictable outcome.
Dimon’s point is not that a recession in the US is impossible, but rather that we have a set of conditions that we have not seen before.
“If we go into a recession, it could be different from previous recessions,” he said, adding that JPMorgan will endure a series of scenarios. “We are not wishful thinkers. Of course we want it to be okay, but we can all handle that.”
The idea that a market and economic cycles are different than in the past is usually met with skepticism, but Dimon’s point is well made.
It is difficult to find historical parallels to the situation the global economy is in, where high inflation has been driven by unprecedented stimulus in the face of an unprecedented global pandemic that is not over yet.
And the question of how inflation is brought under control is not an easy one to answer. Interest rates will clearly rise, but whether the lingering effects of that stimulus mean inflation will be harder or easier to tame than in the past is hard to predict. Savings are higher, but so are debt levels – will that mean recession is coming sooner than in the past, or can a soft landing be made?†
What is clear is that conditions are changing incredibly quickly. After US markets closed, social media group Snap – owner of SnapChat – decided warned it would miss revenue and profit targets because “the macro environment has deteriorated further and faster than we expected when we released our quarterly guidance last month”.
That things could go wrong so quickly for this company – Snap only released its quarterly results for March on April 21 – is worrying and underscores the conflicting forces that Dimon is referring to, where consumers can both make money and be very nervous.
Snap stocks, which had already fallen 52 percent this year, fell another 30 percent in aftermarket trading, pushing broader U.S. futures lower and ending Monday night’s relief rally.
All this underlines the central point of Dimon. The confluence of events driving markets and economies is very different from what we have seen in the past, so the results are unpredictable and the pace of change fast.
Dimon says JPMorgan is ready to run a wide variety of scenarios. Investors should think the same way about their portfolios.
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