Amid what it’s fair to describe as one of the most bizarre weeks in recent market history, JPMorgan’s Marko Kolanovic suggested that buying the dips is still the best strategy for a number of reasons, including still low positioning from some investor cohorts, vaccine rollout, and unprecedented policy accommodation.
“The monetary and fiscal backdrop of 2021, along with the strong recovery from COVID-19 and relatively low positioning in risky assets, should be positive for stocks and commodities and negative for bonds,” Kolanovic wrote, adding that “short-term turmoil, such as the one this week, are opportunities to rotate from bonds to equities.”
Read more: Marko Kolanovic: ‘Outlook Is Positive, Buy The Dips’
But Marko’s generally constructive outlook wasn’t without caveats.
I’ve talked at length here recently about the difficulty of defining a “bubble.” In fact, I’ve had a bit of good natured fun at the expense of some industry “legends” (e.g., Jeremy Grantham and Stan Druckenmiller) for the extent to which their efforts to publicly call the top (always an exercise in futility during periods defined by speculative excess) have led them to stack superlatives atop superlatives in an attempt to outdo their own bombast. That’s how Druckenmiller’s asymmetric risk/reward profile turned into “an absolute raging mania” and how Grantham’s “Real McCoy bubble” turned into “a fully-fledged humdinger.”
To be clear, it’s not that they were necessarily “wrong” in what they were trying to convey. Rather, the problem is that it’s impossible to know when people who are swept up in an emotional frenzy (especially one involving money) will become “sane” again. Far too often, these “legends” make the mistake of believing that past experience and/or success allows them to forecast human behavior. When pressed, they’ll admit that’s a fool’s errand, but it never seems to stop them from trying.
Anyway, JPMorgan’s Kolanovic takes a much more down-to-earth approach.
“While our view is positive, we do acknowledge that some market segments are most likely in a bubble,” he said, citing “excessive speculation (including but not limited to retail investing) as well as perceived benefits for these segments from the pandemic and related political trends.”
For Marko, a rough proxy for “bubbles” are instances in which assets quadruple in a period of around three years. By that measure, the S&P obviously doesn’t count, and “especially” not when you consider “the amount of fiscal and monetary easing in that time period and given that many value and cyclical stocks are actually down over the past three years,” Kolanovic remarked.
So, what is a bubble right now? Well, for Marko, EV and solar names might be candidates.
The irony, though, is that while some names in those spaces are likely in bubble territory, there’s obviously a case to be made that the world is moving far too slowly to adopt technologies and policies that favor sustainable energy.
At the same time, the green energy push has made pariahs of fossil fuels and other traditional energy sources.
That could make for a precarious conjuncture, Kolanovic remarked.
“Despite bubble-like capital allocations to green energy technologies, the solar and wind shares of primary energy consumption in the US are only ~1% and 2.6%, respectively,” he said, adding that,
In a scenario of stronger post-COVID growth and inflationary pressures, energy needs could result in significant supply-demand frictions. Given the low level of new investing in traditional energy, and inability to quickly change the popular investment, ideological, and geopolitical paradigms, it is possible that a full-blown energy crisis of the western world could materialize with a potential to destabilize financial markets, economies, and more broadly societies.
So, if you’re looking for a tail risk from Kolanovic, there’s one. He called it the “COVID-green risk.”
Don’t worry too much, though. As Marko made clear, that “is not our forecast, but just one risk scenario to consider.”
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