Those looking for a sign from the gods that it’s ok to buy the dip in equities will have to wait for the next round of Fedspeak, which one imagines will feature policymakers attempting to strike a more upbeat tone after the White House admonished Jerome Powell for what was (perhaps mistakenly) interpreted as a dreary message delivered during the post-FOMC press conference this week.
In the meantime, though, investors can take some solace in constructive comments from the man who CNBC once dubbed “half-god”, JPMorgan’s Marko Kolanovic.
When last the market heard from perhaps Wall Street’s most recognizable sell-side name, Marko was “dialing down” the bullishness after nailing a call for a sharp rebound in stocks. That was on May 28, when Kolanovic fretted that pandemic politicization may threaten the rally, at least in the near- to medium-term.
In a note out Friday, Kolanovic writes that since late last month, “market risks of escalating tensions with China have declined as the risks related to US protests and social unrest have increased”.
On the heels of the three-day slump in stocks which culminated with Thursday’s dramatic rout, Marko is “more comfortable with taking a positive view, as positioning in equities did not increase significantly and China risks appear to be abating”.
One of the points I’ve attempted to emphasize in these pages over the past two weeks is that positioning for key investor cohorts remains generally light.
A few days back, for example, I wrote that “ostensibly, there’s room for the rally to run given still lackluster participation”. I used a variety of visuals to illustrate the point.
Kolanovic notes that “both systematic exposure and HF betas were quite low even before [Thursday’s] sell-off”. He puts CTA exposure in the ~20th %ile, Vol targeting in ~5th %ile and Global HFs in just the ~15th %ile.
One imagines those are even lower following Thursday’s selloff.
Nomura’s Charlie McElligott delivered a similar assessment Friday. “The overall systematic positioning in Equities remains light”, he wrote, adding that “CTA equities exposure is at just 11.5%ile since 2011 [while] risk parity equities exposure remains absolutely obliterated on account of the tectonic vol events of the past few months at just 0.2%ile”.
Kolanovic does take note of elevated retail trading activity, but doesn’t see much scope for a full-on retreat from that crowd.
“Given the unique set of circumstances (more savings, staying at home, substitute for sports betting and online gaming, etc.), we do not see the retail dynamics changing”, he writes.
As far as systematic re-leveraging and hedge funds, his assessment is straightforward. If volatility manages to remain some semblance of well-behaved, systematic investors will add exposure over the summer and, at the least, fundamental/discretionary investors will see dips as opportunities.
As far as risks go, there are three rather glaring issues: domestic unrest, Sino-US tensions and, of course, the possibility of a second COVID wave.
Marko thinks the likelihood of another broad economic lockdown isn’t particularly high. He also notes that when it comes to the trio of risks vexing investors, they are negatively correlated. To wit, from his Friday note:
For example, if there are more domestic problems, the administration is likely to be less focused on China. If there is less COVID-19 risks, the population and media may be more focused on social issues. There could even be a negative autocorrelation — e.g., less COVID19 risk allowing more protests, which, in turn, may lead to more COVID-19 incidence, etc.). Offsetting between these risks means that there will always be some risk and a negative narrative to push, but also it reduces the chance of a worst case scenario where all risks escalate at the same time.
The conclusion from Kolanovic is simply that while risks remain, “investors should be buying the dips” unless the circumstances change.
I would note (again), that while you may or may not have agreed with Marko’s take on the likelihood of a quick rebound for stocks in late March and early April, his call for US equities to reclaim record highs by early 2021 very nearly played out by early June.