JPMorgan Warns Investors: Brace for 1970s-Style ‘Stagflation’

JPMorgan warns that the US economy may be heading for a stagflation similar to the 1970s.

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JPMorgan Chase strategists say that while U.S. stock prices reached a record high in the past week, the rally could not last long due to the increased risk of the economy returning to the 1970s stagflation.

Marko Kolanovic, chief market strategist at the bank, warned clients in an analyst note that the economy could leave the “Goldilocks scenario” – where it’s not growing or contracting too much – and enter a stagflation period similar to the 1970s.

Kolanovic wrote: “Going back again to the question of the macro-market regime, we think that there’s a risk the narrative will turn from Goldilocks back towards 1970s stagflation with significant implications on asset allocation.”

NYSE Floor Traders – Traders working on the floor of the New York Stock Exchange, New York City on June 30th, 2022.

Stagflation is a combination of high inflation and economic stagnation, which is characterized by high unemployment as well as soaring prices.

In 1980, the U.S. economy was ravaged by this phenomenon. High oil prices, high unemployment, and a loose monetary policy drove the consumer price index to 14.8%, which forced Federal Reserve policymakers that year to increase interest rates up to almost 20%.

Analysts said that there are many parallels to current times. We already experienced one inflation wave, and it began to be questioned whether we could avoid a second wave if geopolitical and policy developments continue on the same course.

Fears of stagflation grew in 2022, as the Fed aggressively raised interest rates to curb raging inflation. But they dissipated by last year after signs showed that price pressures had subsided without having a significant impact on economic growth.

There have been recent signs that inflation progress is slowing down. In December and January, the consumer price index was above expectations in both months. This raised concerns that inflation may stabilize at a level abnormally high.

Investors had previously bet on a series of aggressive rate cuts this year. However, they have now lowered their expectations due to the higher-than-expected inflation data and cautious messages from Fed officials.

Kolanovic stated that investors should be aware of the possibility that rates may have to remain higher for a longer period and that the Fed might need to tighten its financial conditions.

JPMorgan CEO Jamie Dimon also noted the similarities in the economy between the 1970s and 2024. These include massive fiscal deficits, government spending, and changes to trade flows.

JPMorgan Chase CEO Jamie Dimon will attend a hearing on Wall Street firms’ annual oversight before the Senate Committee on Banking, Housing, and Urban Affairs on December 6, 2023, in Washington, D.C.

He said, “I am a little skeptical of this ‘Goldilocks-type’ scenario” in December.