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JPMorgan: Market volatility to hit the economy

JPMorgan signage on the door of an office building in New York.
Scott Mlyn | CNBC

The horrible start to the year in stocks may begin to become the tail wagging the dog, causing the very economic turmoil it is supposed to be forecasting, strategists at JPMorgan Chase warned Tuesday.

So far in 2016, a global sell-off due to concerns about the health of China's economy, along with sharp losses in the energy complex, has pushed most major stock benchmarks into correction or bear market territory.

"There is increasing risk that elevated volatility starts incurring enough technical damage to market psychology and spills over, negatively impacting investor, consumer and business sentiment, resulting in a lack of risk-taking, and eventually creating a negative feedback loop into the real economy," wrote JPMorgan U.S. equity strategist Dubravko Lakos-Bujas. He doesn't predict a technical recession for the economy, but rather an "earnings recession" where profits decline.

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Because of the elevated risk in the medium term, the strategist slashed his year-end price target for the S&P 500 to 2,000 from 2,200. The new estimate implies the index may only move up about 5 percent from where it currently trades.

Here's what JPMorgan is telling clients to buy in anticipation of this potential earnings recession.