Well, good news (again). Marko Kolanovic is still bullish – or if not “bullish” at least “constructive.”
The doomsday crowd was dismayed back on February 1 when Marko suggested that recent volatility wasn’t sufficient to trigger the type of systematic unwind he’s been variously warning about for years and to be sure, Kolanovic was wrong. Just a day later, an above-consensus AHE print underscored upside Fed risk, exacerbated fears about the bond selloff, and sent stocks sharply lower. Then, on Monday February 5, the bottom fell out, triggering the dreaded VIX ETP rebalance avalanche and the largest VIX spike in history.
After a mea culpa, Marko suggested that the systematic de-risking had likely run its course and on February 9, his colleague Nikolaos Panigirtzoglou gave what amounted to an “all-clear” signal. The timing of Panigirtzoglou’s note (3:30-ish ET) was fortuitous and might well have helped catalyze the late Friday rally that set the stage for the buying spree that unfolded the very next week.
In terms of systematic selling, this is largely over. In fact our models show that volatility targeting strategies may now start very slowly rebuilding their equity positions. One should also keep in mind that most pension funds rebalanced at the end of January, and global markets are now ~5% lower from that point (~90th percentile by size of the drop).
Well fast forward to this week and Kolanovic and Panigirtzoglou are out with an asset allocation update and long story short, they’re reinforcing the Goldilocks narrative.
“Our macro views remain constructive: growth momentum is still robust and above-trend (despite some moderation), inflation is normalizing but unlikely to see a dramatic uptick, and the Fed will continue to tighten policy but remain accommodative,” they write, in a note dated March 8. “Without a clear threat yet to end this cycle, our asset allocation remains pro-cyclical and OW equities vs broad fixed income.”
They go on to suggest that you’re probably a little too worried about all the bearish narratives:
Narrative of recent selloff: imminent concerns about inflation, rates, trade wars, and a growth downshift are overblown, in our view. Although we recognize longterm risks stemming from market illiquidity and volatility, we believe that the equity OW should be underpinned near-term by strong corporate and macro fundamentals, stabilizations of long-dated UST yields, and increased inflows into equities. Positioning and valuation also look more attractive following the equities technical sell-off in early February.
Then, amusingly, Kolanovic reminds you that his “buy the dip” call was dead on.
“The equity market bottomed on February 8th, which was the date of our publications recommending to buy the dip,” he writes, before reminding you that “since then, US Equities staged a rally and almost reached previous highs by the end of February.”
In case you need a visual:
Who’s going to be buying stocks from here? Well, according to JPMorgan, the systematic offer from early February will morph into a bid as vol. normalizes and then there’s the buybacks. Oh, and Marko is sticking with his contention from two weeks ago that eventually, the UST shorts are going to get squeezed:
Although we recognize long-term risks stemming from market illiquidity and volatility, we believe that the equity OW should be underpinned near-term by strong corporate and macro fundamentals, stabilization of long-dated UST yields (for instance, we note that bond futures shorts are already at record levels which will be a headwind for yields), and increased inflows into equities. These equity inflows will come from systematic investors as volatility normalizes, and a large increase in share buyback flows. For instance, an anticipated record ~$800Bn of US stock buybacks (~$240bn more than last year) on its own can change the supply-demand picture for equities. Systematic flows may also be supportive of an equity recovery going forward. As market realized volatility declines (post-February shock), volatility targeting strategies will add exposure and trend following investors are more likely to add to equity exposure.
So there you go. Another excuse to stay long (or get long).
And God knows some of you were looking for some confirmation bias for your bullish inclinations amid the trade war banter.