JPMorgan Says U.S. Stocks May Lack Haven Status in This Crisis

(Bloomberg) -- U.S. equities may not be able to offer the protection they’ve provided during previous recessions this time around and it’s a mistake to think the market has reached the bottom, according to strategists at JPMorgan Chase & Co.

Despite powerful stimulus efforts, the shock from the pandemic and damage to corporate profits, the labor market and consumer sentiment will prove long-lasting and prevent the U.S. economy from quickly bouncing back, according to JPMorgan. U.S. economic activity will only bottom out gradually, instead of producing the V-shaped recovery that usually follows one-time events like natural disasters, said the strategists.

“The U.S. might not end up as a traditional safe-haven during what is a consumer/services recession,” said JPMorgan strategists Mislav Matejka, Prabhav Bhadani and Nitya Saldanha. “Trying to buy the market simply based on technically oversold levels and admittedly larger by the day policy support, might be missing the elephant in the room -- the first consumer and labor market downcycle in 11 years.”

In the current situation, the JPMorgan strategists recommend taking profit on short-term market bounces and maintaining a defensive allocation, as new stock market lows could lie ahead. They note that it took the S&P 500 as long as 18 months on average to reach a final low during past recessions.

While the analysts are underweight the U.S. stock market, they are overweight euro-zone, Japan and China shares. The S&P 500 is down 23% this year and just ended the first quarter with the worst slump since the 2008 financial crisis as the deadly pandemic spread across the world and the death toll surged in New York and other major U.S. cities.

To be convinced to start buying stocks on a sustainable basis, the JPMorgan strategists said they’ll need to see the absence of a second wave of infections in China and western countries once the lockdowns are lifted, as well as more significant stimulus packages. A drop in equity valuations closer to 10 times estimated earnings -- from the current 15 times for the S&P 500 -- would also be a buy signal.

America’s labor market is collapsing faster than at any point in the last century as government-mandated shutdowns to contain the coronavirus force companies to close their doors. Almost 10 million jobless claims have been filed in the past two weeks and March payrolls fell 701,000 from the prior month, compared with the median forecast of economists for a 100,000 decline.

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