JPMorgan Expects a Market Correction Due to the War. How Large?

Amazingly, after plummeting on Monday morning over fears of a larger-than-expected war in the Middle East and spiking oil prices – well over $110 a barrel over the weekend – the S&P 500 index ended the trading session in the black. What happened to turn a plunging market back up?

President Donald Trump said in an interview Monday that “the war is very complete, pretty much,” indicating that the conflict with Iran may be near an end. Markets bought it, and the S&P 500 reversed direction while oil prices fell back below $90 a barrel (for Brent crude).

Yet investment bank JPMorgan Chase (JPM +0.20%) has said that it expects a correction in the stock market of as much as 10% from the peak it hit on Jan. 28.  (Technically, a correction is a market drop of 10% to 20%, while a larger drop than that signals a bear market.) The S&P 500 is now about 2.9% below that peak.

Image source: Getty Images.

JPMorgan Chase’s analyst said that the conflict in the Middle East showed no signs of abating and that investors generally have not de-risked their portfolios significantly. Thus, more selling will occur. Still, the analyst wrote that the correction scenario could be avoided if there is an off-ramp to the conflict soon.

It’s not clear how Trump envisions the end of the conflict, and he didn’t speak of any clear off ramp for it. So both scenarios remain possible, though it might pay to be more cautious about how the war plays out.