JPMorgan’s Marko Kolanovic maintained a generally upbeat assessment on the US economy and the outlook for domestic equities from late last year through the second quarter of 2019.
Indeed, Kolanovic was adamant in January that stocks would recover quickly from December’s rather harrowing swoon on the way to new highs. He was proven correct – and in relatively short order.
Through it all, though, Marko has consistently warned that modern market structure poses risks under certain conditions, and he’s also been a vocal critic of what we’ve previously described as the “financial agitprop” echo chamber, which serves to amplify negative sentiment, fueling the liquidity-volatility-flows feedback loop.
Read more on “The Acquittal Of Fear”: How The Financial Crisis Changed Our Perception Of Reality
With the above in mind, it’s worth highlighting some additional excerpts from Kolanovic’s Tuesday note.
Marko’s latest grabbed headlines for his assessment of the dramatic Momentum unwind and factor rotations which played out on Monday and Tuesday. We documented that assessment and summarized his near-term outlook here.
But in addition to his granular take on recent dynamics and his tactical outlook over the next couple of months, Kolanovic on Tuesday delivered something of a critique of the overall environment as well as a pseudo-lament for the factors which have undermined confidence.
“As the US-China trade war destabilizes the global economy and Trump’s tweets continue destabilizing financial markets, many managers find it difficult to be invested in equity markets”, he wrote, adding that “the estimated equity exposure of hedge funds recently dropped to lows last seen during the 2008/9 Great Financial Crisis”.
But it’s not just equity hedge fund managers. Retail has been spooked too.
“Sentiment of individual investors as measured by the AAII bull-bear indicator dropped to levels seen in 2008, and during crises in 2015 and 2018”, Marko went on to point out, on the way to bemoaning the possibility that “uncertainty brought about by the trade war has erased confidence built over a decade in the equity markets, both with more sophisticated investors (hedge funds) and individual investors alike”.
Later in the note, Kolanovic highlighted a persistent feature of the post-crisis environment – namely that the corporate bid has acted to support the market in the absence of enthusiasm from investors.
“As institutional and individual investors pulled money out of the US market, US corporates continued buying their own shares, supporting large cap stock prices”, he wrote.
The following two visuals from Goldman show corporate cash usage skewed towards buybacks (left pane), which are by far the single-largest source of US equity demand (right pane).
Repurchases by big tech and financials were behind an uptick in the corporate bid among BofA’s clients last week, the bank’s Savita Subramanian and Jill Carey Hall said in a Tuesday note.
Indeed, those buybacks almost offset what the two strategists described as broad-based selling from other investor cohorts. Overall, the bank’s clients were net sellers of domestic equities last week for the first time in months. Hedge funds, private clients and institutional clients were all net sellers too.
“The sole buyer of US stocks remains corporates, not institutions”, BofA’s Michael Hartnett reminded market participants last week, in the latest edition of his popular “Flow Show” series.
And yet, despite the corporate bid and the mechanical fillip from falling bond yields, stocks have barely managed to eke out a gain over the past year and a half, something Kolanovic emphasized on Tuesday as well.
“Even with the support of buybacks and historically low bond yields, the market is nearly flat from January 2018”, he remarked, on the way to noting that “this performance ranks poorly, i.e., below the 20th percentile, over the past 30 years”.
And that’s just at the index level. When you drill down, the real impact of political decisions becomes clear.
“The picture is much bleaker when looking at decimated cyclical segments such as manufacturing, oil and gas, steel, agriculture, and SMid cap companies”, Marko said, adding that those areas of the market are the “most negatively impacted by the current administration’s policies”.
The irony, of course, is that those are precisely the sectors and names that Trump’s populist platform was ostensibly aimed at helping.
None of the above is to suggest that Kolanovic is bearish – he’s not, as noted here on Tuesday. It’s just to point out that the market is laboring with an albatross around its neck, a regrettable state of affairs that doesn’t seem likely to resolve anytime soon.