If you see a dip, buy it.
That’s one takeaway from JPMorgan’s Mislav Matejka, who suggested that, at least over the next several months (and likely through the end of the year), stumbles in risk assets won’t last, with policy support and abundant liquidity serving as a rationale to reengage.
It’s a familiar narrative. And one you’ll probably keep hearing. Matejka did note that positioning is stretched on some metrics, as are tactical indicators, but consolidation (if that’s what we get) is something different from a selloff. Matejka said the reopening trade has legs, echoing the general sentiment expressed by the bank’s Marko Kolanovic late last month.
Last week, JPMorgan’s Shawn Quigg said pretty much the same thing in an options strategy piece called “Buy in May and Go Away.” “A continued rally in commodities, and a resurgence of Treasury yields higher, stand to be near-term catalysts for value and cyclical stocks,” he reiterated, adding that a further rotation to cyclical value “is likely to accelerate into late spring and the summer.” Although liquidity has improved, Quigg noted that market depth “remains thin, which may also increase the risk of upside pricing gaps, particularly during the summer months.”
Remember: Just as thin markets and a dearth of liquidity can exacerbate selloffs, the same conditions can turbocharge upside. The figures (below, from Goldman), show the improvement, but when we talk about market depth, it’s always in the post-Volpocalypse (i.e., post-February 2018) context. In many respects, liquidity never really recovered from that episode.
Who knows, perhaps we’ll get just such an ostensibly buyable dip this week. Tech looks weak early in May, and if the bond selloff resumes or the reflation trade starts to reestablish itself in earnest, expect tech to wobble commensurately, notwithstanding fantastic quarters from the titans last week (here and here).
Morgan Stanley described the pace of earnings beats this reporting season as “strong but expected,” and flagged the same lackluster follow-through discussed by Goldman (and plenty of others) last week. Most of the good news, Morgan said, may be priced in.
From a macro perspective, Tuesday offered more of the same. Commodities were higher, extending a torrent surge. That’s pushing up input prices which, eventually, will be felt by consumers. Or absorbed by corporate bottom lines. I’ll let you decide which is more likely.
Final manufacturing PMIs for April (from IHS Markit) and ISM manufacturing (in the US) underscored the extent to which supply chain disruptions are pervasive. That’s colliding with rising demand. “Strong industrial and consumer demand combined with the continued absence of belly space in air and the slower turnaround of container equipment means supply chain bottlenecks remain firmly in place,” Goldman remarked, illustrating the point with the figures (below).
The questions for the world’s largest economy are mostly just permutations of whether all the good news is in the price. As SocGen’s Kit Juckes put it Tuesday, “It’s not that the US doesn’t matter now, but… we know the US is doing very well.” The question, Juckes said, is: “Who’s catching up and who isn’t?”
All in all: Same narrative, different day. Which isn’t the worst thing, I suppose, depending on who you are, and where you are.
As Jerome Powell emphasized Monday, it’s not all roses at the “street level.” He didn’t mean Wall Street. Things are going fine there. Just don’t say “Archegos.”