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JPMorgan: Challenging 2023 But A Market to Accumulate

It is a time when different institutions will put out their recap of 2022 and outlook for 2023.

JPMorgan is no different, and here are some of the exciting slides from their private banking updates.

The update is less about what happened and where we are at now.

All Signs Point to a 2023 Recession

PMI below 50 and an inverted yield curve indicate an economic slowdown. If both show up together, the chances of recession are much higher.

The next question is whether it will be mild or something of the magnitude similar to the Great Financial Crisis. JPMorgan does not think the recession and the eventual 2023 market downturn will be that bad.

Valuations Look Better Today (and in 2023) than 1 Year Ago

This much is obvious.

If you are apprehensive about investing in something that does not look cheap, now things are cheaper.

Here’s JPMorgan’s forecast annual return for the next 10-15 years. The majority of asset class looks decidedly better and higher.

Earnings per share of equity should go down, which may mean the large caps, represented by S&P 500 may not be extremely cheap.

Bond valuation return to valuations last seen a decade ago. In particular, 10-year Treasury less expected inflation is not so negative anymore.

Most bond grades look more attractive.

The biggest difference reserve for European Investment Grade and 3-month US Treasury Bills.

JPMorgan likes the mid and small-cap space as the valuation has declined to 2000 valuations.

USD at 15-Year High

USD is the highest-yielding reserve foreign exchange currency, and its spread versus this cohort is approaching 15-year highs. USD is also the only defensive currency among the G10 high yielders, and 56% of currencies globally now yield less.

Somehow, previous highs tend to coincide with big corrections.

U.S. Mortgage Rates Will be a Big Overhang in 2023 – Housing Has Never Been This Unaffordable.

JPMorgan expects U.S. home prices to decline by 10% under the pressure of higher mortgage rates and affordability challenges not seen since the 1980s.

Interestingly, 80% of borrowers have a mortgage rate of 4% or lower and are largely locked in into their homes. In the US, homeowners can lock in 30-year of fixed mortgages, and many have locked in low mortgages.

If you have a low-interest mortgage, you are reluctant to sell because a new place you are considering will be less affordable, this would limit the supply, and together with muted demand, home prices may not grow so much for the next two years.

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