JPMorgan Sees `Illogical' Rout as Yellen Links Markets, Economy

  • Chief strategist sees panic as driver of stock selloff
  • Janet Yellen says market volatility could strain economy

JPMorgan Chase & Co. says people are wrong to sell stocks for fear of a U.S. recession. The Federal Reserve says if they keep doing it, they’re going to get one.

Such is the circular logic that has engulfed the Standard & Poor’s 500 Index as it extends a yearly loss to 11 percent and Fed Chair Janet Yellen highlights the possibility that volatility in financial markets will weigh on the U.S. economy.

First investors had to deal with an assortment of issues from cratering oil prices to the strengthening dollar and contracting corporate profits. Now, they must wrestle with the notion that their reaction itself could make things worse. David Kelly, chief global strategist at JPMorgan Asset Management in New York, has a piece of advice: chill.

“Markets are behaving in a particularly illogical fashion right now,” said New York-based Kelly. “Nothing has happened in terms of the information flow to justify this kind of movement down in equity prices. The trend is very much people sitting on the sidelines because they hear people say there’s a recession, they see the market fall and they think the market sees something they don’t see. There is a negative feedback effect.”

Yellen’s testimony before the House Financial Services Committee on Wednesday addressed the possibility markets might contribute to a contraction, rather than simply signal one. While acknowledging that rising volatility may reflect “fears of recession risk,” her prepared remarks noted that swings in stocks and currency could themselves “weigh on the outlook for economic activity and the labor market,” particularly if they last.

Just because Yellen said the market can weigh on the economy doesn’t mean it will, JPMorgan’s Kelly said. While talk of recession from central bankers around the world can make investors more cautious, the economy will be able to withstand any effect falling stock prices may have on consumer behavior, he said.

“The real problem continues to be the fact there is a lack of buyers around the world,” according to Kelly. “There are plenty of professional sellers and organizations that will take the market down but there is no interest among long-term retail investors to get in at this point. The problem is this perception that the consumer hasn’t gotten better. They have.”

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