There's an 85% chance of a recession based on stock market price action as gloomy talk of a downturn becomes self-fulfilling, JPMorgan says

The current price action of the stock market has increased the likelihood of an economic recession to 85%, according to a note from JP Morgan.

The S&P 500 entered bear market territory earlier this week, and is down more than 23% so far this year. The S&P 500 has experienced an average decline of 26% during previous recessions.

As both consumers and investors worry about 40-year records in inflation and fast-rising interest rates, the damage to stocks isn't done. The Federal Reserve hiked interest rates on Wednesday and is expected to do the same next month.

If pessimism about the economy persists, it could become self-fulfilling, as confidence in the economy often has an outsized influence on the spending habits of both consumers and corporations.

There is heightened concern about the prospect of a US recession which by itself has the potential to become self-fulfilling.

Search trends for the word "recession" have already surpassed the high seen in 2008 and are close to the historical high from March 2020.

A growing concern among investors is the possibility of a central bank policy mistake after the Fed hiked interest rates. The idea that the Fed was too late to hike interest rates to tame inflation is a policy mistake that can break the economy and lead to future interest rate cuts.

The front end of the US curve has worsened with almost 100bp of policy reversal. The bank said there are first signs of a policy mistake by the European Central Bank.

The Fed is expected to stick a soft landing and avoid a recession as the economy continues to recover from the COVID-19 epidemic.

If pessimism persists, the forecast will fall flat, increasing the chance that investors will talk themselves into an economic downturn. The US Consumer Confidence fell to a new low last week.