The stock market could see 11% upside despite jobless claims flashing recession signal, JPMorgan says

  • The stock market could see 11% upside over the next year based on a jobless claim indicator tracked by JPMorgan.
  • The bank said when jobless claims moved 10% higher than the prevailing three-month moving average, stocks usually moved higher.
  • But the indicator has also been a strong predictor of an imminent recession, JPMorgan said.

A full proof recession indicator just flashed, but that doesn’t mean investors should sell stocks just yet, according to a Tuesday note from JPMorgan.

The bank said that every single time jobless claims jumped 10% or more above their prevailing three-month average, the economy ultimately entered a recession.

And that’s exactly what just happened, according to the note.

“There have been no false signals with this indicator. Unlike the shape of the yield curve, or the money supply, which are leading indicators, this one is more coincident,” JPMorgan analyst Mislav Matejka said.

But investors shouldn’t rush to sell their stocks because the same jobless indicator has also pointed to more upside ahead for the market. 

When jobless claims surged 10% or more above the prevailing three-month average, the S&P 500 went on to return an average of 11% over the next 12 months, according to the note.

This, combined with the fact that the labour market remains in a good spot and fairly resilient, with near record job openings, means the stock market could once again surprise investors and rise in the face of a potential recession.

“[Jobless] claims as a share of labour force are in fact still very low in a historical context. Given this, the labour market picture, even though it is weakening on margin, should not be described as a negative,” Matejka said.

Additionally, Matejka pointed to the likelihood that the Federal Reserve’s last outsized interest rate hikes will arrive in September, followed by smaller rate hikes or even a pause/pivot. 

“The Fed could undertake a much more balanced policy view post September, as some of the inflationary pressures continue abating. Gasoline price is tied to CPI, [and] gasoline price is down in the past few weeks,” Matejka said, adding that if bond yields stabilize, so could the stock market.

Finally, resilient corporate earnings have served as a buoy to the market as investors get more and more concerned about rising inflation and a slowdown in the economy, and there’s little sign to suggest that earnings are due for an imminent decline based on earnings revisions.

All-in, while an economic recession could be imminent based on JPMorgan’s jobless claims indicator, so could be an up-move in the stock market. 

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