Investors should brace for the possibility of a 20% to 40% drop in stock prices during the next two or three years, according to Daniel Pinto, co-president and co-chief operating officer (COO) of JPMorgan Chase & Co. (JPM), in an interview with Bloomberg. This would represent a genuine bear market, according to the standard definition of a 20% drop in stock prices. His chief concerns: high valuations, rising interest rates, inflation, and trade wars.
While London-based Pinto said that, right now, "the markets are in good shape," and "we are doing well," he noted that investors are likely to be skittish at this late stage in the bull market. "It's two to three years to the end of the cycle, and the markets will be nervous about anything," he said. However, regarding his prediction of a 20% to 40% decline, Pinto elaborated that "There is never one trigger, it's a combination of factors" that will set off a big market decline.
Rebuttal From the Journal
Should Pinto's 40% drop come to pass, this would be by far the biggest percentage plunge in the S&P 500 since the bear market of 2007 to 2009. However, according to The Wall Street Journal, this prediction, dire as it may sound to investors with short memories, is unexceptional by historical standards. The Journal notes that, on average since the 1920s, a bear market arises once every 3.5 years and sends stock prices down by 35%.
"Any aspiring market pundit worth his or her salt grasps that predicting a market upheaval is a way to get attention," the Journal says. "It is a moderate-risk, high-reward strategy since actually getting such a call right pays off handsomely," the Journal continues. They could have added that, if Pinto is wrong, few, if any, people will remember this interview three years from now.
More Historical Perspective
Pinto spoke to Bloomberg TV in Paris on Thursday, March 8 before the U.S. market opened. Measured from the close on the previous day, a 40% decline in the S&P 500 Index (SPX) would send it down to a value of 1,636. The market last was at this level in August 2013. Versus the all-time record high reached at the close on January 26, a fall to 1,636 would represent a decline of 43.1%.
During the 2007–09 bear market, the index shed 56.8% of its value over the course of 517 calendar days, per Yardeni Research Inc. Prior to that, during the Dotcom Crash of 2000–2002, the S&P 500 dropped by 49.1% over 929 days, also per Yardeni, which counts three other bear market plunges of 40% or more since the 1929 crash. Indeed, Yardeni counts 20 bear markets from 1929 onwards, or about once every 4.5 years, with an average decline of 37%, similar to the Journal's figures.
By way of advice to investors, Pinto said, "Be prepared, because at those times the declines really beat you because the liquidity dries up," adding that they also must "be disciplined." He did not offer specific recommendations, however, but noted that his biggest concern is valuations. "You want to look at valuations, they could become an issue, a trigger," he asserted. A recurring worry among stock market bears has been valuations that are excessive by historic standards. Should the trend of corporate earnings stall or slip into reverse, or if interest rates spike, valuations are likely to crater. (For more, see also: Why The 1929 Stock Market Crash Could Happen In 2018.)
Regarding the world economy, Pinto believes that there is a low probability that a recession will begin in the next few months. However, tariffs and trade barriers strike him as the biggest dangers on the economic horizon. "These tariffs [proposed by President Trump], if they go beyond what has been announced, it will concern the market about future growth." Even some generally bullish market strategists have predicted that the rest of 2018 will offer a bumpy ride for investors, with multiple corrections of 10% or more being likely. (For more, see also: Stock Investors Should Fasten Seat Belts for More Plunges.)
Tariffs Will 'Hurt Growth, Hurt Investment'
JPMorgan Chase CEO Jamie Dimon shared a similar viewpoint in a separate interview with Bloomberg TV. Regarding tariffs, he said, "If it continues and it gets worse, then it will hurt growth, it will hurt investment," adding, "It could offset some of the very huge positives we've had from competitive tax reform." Regarding the broader economic picture, Dimon said, "One day we will have a recession. I don't think it will be this year. Could it be late 2019?"
On the Other Hand
Meanwhile, a decidedly upbeat view of the markets, at least for this year, has been voiced elsewhere in JPMorgan Chase, by Marko Kolanovic, the global head of macro quantitative and derivatives strategy. His team predicts that the S&P 500 will close 2018 at a value of 3,000, driven by strong fundamentals. That would represent a gain of 9.5% from the March 8 close, making a subsequent drop to 1,636, as Pinto suggests, a 54.5% plunge from that point. (For more, see also: Why Stock Market's Big Rally Won't Last.)