Jamie Dimon’s Warning: Could 8% Interest Rates + Inflation Sink Stocks?

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Not a day goes by without someone, somewhere sounding the alarm bells of imminent financial-market danger. When the messenger of caution is Jamie Dimon though, investors sit up and pay attention.

Dimon is the highly respected chairman and CEO of banking giant JPMorgan Chase (NYSE:JPM). He published a new letter to the bank’s shareholders on Monday, but of course, non-shareholders can and ought to read it as well.

Even if you don’t happen to agree with Dimon’s ideas, it’s still worthwhile to hear what the legendary financier has to say. As he surveys the “unsettling landscape” of the U.S. economy and markets, you may be persuaded to review your investment strategy for the remainder of 2024.

Watching for “downside risks”

First, Dimon characterized the U.S. economy as “resilient.” While he didn’t cite the Bureau of Labor Statistics’ March employment report in particular, the jobs data does seem to support this characterization.

Impressively, the U.S. economy added approximately 303,000 jobs in March. That’s nearly 100,000 more jobs than economists had anticipated. Also in March, the unemployment rate fell slightly to 3.8%, and anything below 4% is sometimes considered full or nearly full employment. Other recent data indicates a healthy hiring rate in the U.S. and a rebound in labor productivity.

That’s important because, according to Bank of America (NYSE:BAC) strategist Ohsung Kwon, “If productivity goes higher, then [companies] are able to cut costs, improve margins, things like that.”

With all of that, there’s also evidence that the manufacturing sector is picking up. The Institute for Supply Management’s Purchasing Managers Index (PMI) moved up to 50.3 in March, and anything above 50 indicates that the U.S. manufacturing sector is in expansion mode.

This is positive news since the March reading marks the first time the PMI has been above 50 since September 2022. Furthermore, the 50.3 PMI reading for March easily beat the 48.3 that economists had expected.

With these encouraging data points in mind, investors may be tempted to simply dismiss Dimon’s description of the nation’s economic landscape as “unsettling.” However, investors should bear in mind that Dimon’s perspective is that of a banking executive. Surely, the regional-banking turmoil of 2023 is still fresh in his mind.

Nonetheless, Dimon offers timely reminders for the market’s perma-bulls and “soft landing” optimists. With eyes wide open, financial-market participants can certainly see that America’s “economy is being fueled by large amounts of government deficit spending and past stimulus.” This is practically indisputable, with the U.S. sovereign debt recently surpassing $34 trillion and increasing by $1 trillion every 100 days or so.

Thus, even while the economy may be “resilient,” Dimon is quick to point out the “downside risks.” Among them is quantitative tightening (QT), which is “draining more than $900 billion in liquidity from the system annually.” Then there are the “ongoing wars in Ukraine and the Middle East,” which could disrupt the order of the world, and therefore, the financial markets.

With all of that in mind, Dimon and JPMorgan “remain cautious.” Yet, there’s more to the shareholder letter, including a bombshell or two.

Are 8%+ interest rates and stagflation coming?

Those who lived through the 1970s may have not-so-fond memories of the dreaded “s”-word: stagflation. It’s a brutal combination of stagnant economic conditions (i.e., a recession) and elevated inflation.

Thus, it’s jarring to see the CEO of JPMorgan Chase raising the specter of stagflation in 2024. Yet, Dimon did indeed go there in his shareholder letter.

For one thing, he’s clearly skeptical of the market’s assumption of a 70% to 80% chance of a “soft landing” in the economy. Without specifying his estimate, Dimon expressed his belief that the “odds are a lot lower than that.”

Moreover, Dimon is bracing for interest rates (presumably, the federal funds rate) to vary widely from “2% to 8% or even more.” This is such a wide range that one might say it’s not particularly helpful or isn’t really a prediction at all.

Additionally, Dimon is on the lookout for a broad range of possibilities, “from strong economic growth with moderate inflation… to a recession with inflation; i.e., stagflation.” Again, this may be viewed as unhelpful, although it does make sense for investors to prepare for just about anything in the coming months.

As such, I believe preparation for all outcomes is the gist of Dimon’s message. Eight-percent-or-greater inflation and stagflation aren’t likely, but they are possible. His letter really is just a memo for one’s mental inbox for those who need it, prompting investors to prepare today rather than repair tomorrow.