Dow Soars 600 Points As JPMorgan Rallies—But ‘Vicious’ Bear Market Risks Keep Experts On Edge

Topline

Fresh off the S&P 500’s brief plunge into bear-market territory, financial stocks led a staggering market rally on Monday after bullish news from the nation’s largest lender, but with uncertainty around interest rate hikes still posing a risk to stocks, experts aren’t breathing a sigh of relief just yet.

Key Facts

The Dow Jones Industrial Average soared 633 points, or 2%, to 31,896 by 3:30 p.m. ET Monday, while the S&P jumped 1.85% and the tech-heavy Nasdaq, 1.4%—setting the market up for its first daily increase in a week.

Heading up the Dow and S&P’s gains, shares of JPMorgan—though still down 22% this year—surged 7% after the bank raised its outlook for net interest income this year to $56 billion, up from guidance of $50 billion in January, due to expectations that the Federal Reserve will raise rates to 3% this year.

“Strong economy, big storm clouds,” JPMorgan CEO Jamie Dimon said at the firm’s investor day on Monday, acknowledging a recession is possible due to the unprecedented risks posed by prolonged inflation, geopolitical tensions and the removal of Fed stimulus measures happening all at once.

Despite the lingering skepticism, JPMorgan’s renewed outlook fueled massive gains for a slew of bank stocks, with Citigroup, Bank of America and Wells Fargo surging 7%, 6% and 5.5%, respectively.

“It’s too early to get bullish,” Morgan Stanley analyst Michael Wilson said in a similarly bearish tone on Monday, warning that technology stocks, which have led the market’s decline this year, remain one of the “biggest areas of risk” after retail earnings last week pointed to a struggling low-end consumer and waning profit margins.

“Equity clients are bearish,” Wilson added, saying investors should use any “vicious bear market rallies” to sell riskier stocks and forecasting the S&P will plunge nearly 15% by the end of second-quarter earnings season later this summer.

Key Background

Stocks have posted their steepest decline since the Covid-induced market crash in early 2020 as investor angst swells over the Fed’s looming interest rate hikes this. Though historically low interest rates during the pandemic helped fuel one of the strongest bull markets on record, the Fed in March embarked on its most aggressive tightening cycle in two decades in a bid to cool decades-high inflation. “Recession risks are high—uncomfortably high—and rising,” Mark Zandi, chief economist at Moody’s Analytics, said in a weekend note. “For the economy to navigate through without suffering a downturn, we need some very deft policymaking from the Fed and a bit of luck.”

Contra

“Future returns really improve once stocks are down 20%,” explains LPL Financial Chief Market Strategist Ryan Detrick, who notes stocks have posted a median gain of nearly 24% a year after a bear market starts. “There have been a lot of bear markets over time, but one thing that has always happened is stocks have eventually come back to new highs.”

What To Watch For

Stocks will likely find a bottom when the Fed signals a pause in its tightening campaign, inflation begins to recede, or the Chinese economy, which has collapsed this quarter due to stringent Covid lockdowns, normalizes, says analyst Tom Essaye of The Sevens Report.

Further Reading

Here’s How Long It Takes For Stocks To Recover From Bear Markets (Forbes)

S&P 500 Briefly Plunges Into Bear Market As Stocks Fall For Seventh Week In A Row (Forbes)

Here’s The Worst Case Scenario For Stocks, According To Goldman, Deutsche Bank And Bank Of America (Forbes)