Stocks facing inflation 'pretzel logic' but time to prepare for next cycle - JP Morgan analyst

Alistair Berg

JP Morgan analyst Elyse Ausenbaugh said Wednesday that the stock market is facing a complex time, with the Federal Reserve balancing the risks of inflation versus the possibility of a recession. However, she added that investors should still look for opportunities to set themselves up for the next market cycle.

"It's a lot of pretzel logic right now," the global investment strategist at JPMorgan Private Bank told CNBC, noting that steps the Fed takes to control inflation also raise the chances of a recession.

However, Ausenbaugh argued that the central bank was right to focus on price stability.

"Priority number one absolutely has to be getting inflation down," she said. "I think the Fed is very easily justified going by 75 [basis points] come September."

That said, the JP Morgan analyst contended that policymakers will likely take upcoming data into account as they decide whether to raise interest rates by 50 or 75 basis points at their next meeting in September. She pointed to upcoming reports on consumer prices and jobs as significant statistics in determining the central bank's near-term decision-making.

Given the current situation, Ausenbaugh recommended a "directionally defensive" stance. However, she also believes investors should start looking past the Fed's current rate-hiking cycle and prepare for the next set of market conditions that will emerge down the road.

"We are getting excited by some of the opportunities that the current distribution of risks is starting to present," she said.

"We're also starting to get more and more interested in small- and mid-cap equities because of all of the pain that they've already been through and just kind of thinking about positioning for the next cycle and what the rebound is going to look like on the other side of this," she added.

For more on the near-term prospects for the economy, see why UBS places the odds of a recession at 60%.