Stocks would fall right back into a bear market if they adopted economic view of bond market, JPMorgan says

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It seems fitting that the S&P 500?SPX,?+0.62%?ended its?248 trading-day stint in a bear market?on the same day that a report?showed initial jobless claims at its highest level in nearly two years.

Up is down, down is up, same as it ever was on Wall Street. Main Street has finally capitulated, judging by the American Association of Individual Investors survey that found above-average optimism for the first time since February. So … look out below?

A team led by Nikolaos Panigirtzoglou, global market strategist at JPMorgan, gives credence to that worry in an update of a piece done earlier in the year, looking at the role of inflation uncertainty in the fair value models for both the 10-year Treasury real yield and the S&P 500 index. It’s a very complicated calculation, but we’ll get to the conclusion.

“Bond markets are still pricing in a sustained period of elevated macroeconomic uncertainty, even if there has been some modest decline over the past three months. By contrast, equity markets look ‘priced for perfection’ with the S&P now above a fair value estimate looking through the rise in macroeconomic volatility since the pandemic,” the strategists say.

If equity markets were to price in a rise in inflation volatility to levels that the bond markets do, it would imply a 20% downside from current levels, the JPMorgan strategists say.

The strategists don’t say what it would take for the equity market to be as worried as the bond markets. But you don’t have to look far to see an event that could shake markets. Even permabull Tom Lee says next week “might be the most consequential week for the rest of 2023,” owing to the inflation data out Tuesday, as well as the Fed decision. Granted, Lee is of the view that inflation is tracking lower than consensus expects, but note the wave of inflation surprises to the upside outside the U.S., the latest coming from Norway on Friday.

A 20% fall from a peak, by the way, marks the definition of a bear market. And the short bull market since 1932 was the last one, which started shortly after the onset of the global pandemic and lasted 21 months.

The market

U.S. stock futures?ES00,?0.07%?NQ00,?0.35%?drifted lower. The dollar?DXY,?0.08%?edged up, and the yield on the 10-year Treasury?TMUBMUSD10Y,?3.753%?was 3.72%.

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