Stocks fall 20% if bonds have good inflation in JPMorgan model

(Bloomberg) – The growing disconnect between stocks and bonds suggests a 20% downside risk for stocks if bonds prove correct in pricing inflation volatility, according to modeling by strategists at JPMorgan Chase & Co.

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The view highlights how investors across different asset classes have struggled to understand the market landscape since the pandemic. Divergence was on full display this week, with the S&P 500 entering an equally firm bull market for another Federal Reserve rate hike in July and after central banks in Australia and Canada took traders on the back foot. -foot.

“Bond markets are still pricing in a prolonged period of elevated macroeconomic uncertainty, although there has been a slight decline over the past three months,” strategists including Nikolaos Panigirtzoglou and Mika Inkinen wrote in a note. “In contrast, equity markets appear to be ‘priced for perfection,’ with the S&P now above a fair value estimate given the rise in macro volatility since the pandemic.”

Inflation volatility, however, also poses a risk for bonds, strategists say. “If bond markets were to face rising inflation since the start of 2021, real 10-year US Treasury yields could fall by around 70 basis points,” they wrote.

Read more: S&P 500 hits bull market milestone as traders ponder Fed path

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