Not everyone is on board with the idea that the ongoing swoon in US equities makes sense from a fundamental perspective.
“Recent bearishness in equities is overdone, and out of line with activity momentum, easing bottlenecks and what we expect to be a strong earnings season,” analysts led by JPMorgan’s Marko Kolanovic said, in a Monday note.
US shares kicked off FOMC week with a wild session punctuated by a whiplash-inducing reversal. The S&P’s Monday afternoon turnaround (from a 4% decline to a green close) was the largest such reversal since the depths of the financial crisis. Going back 31 years, only three times have US stocks staged a comparable about-face to close higher.
The culprit for 2022’s overriding bearish tone in risk assets is real yields. It’s worth noting that 10-year reals are back to -63bps, 13bps below the “highs” seen last week (figure on the left, below).
JPMorgan called 2022’s price action “anything but calm.” “Real yields have risen about 50bps YTD, effectively accounting for more than the upward move in nominal yields,” the bank remarked. That’s illustrated by the figure on the right (above).
“Technical factors have magnified the price action but the repricing of the Fed and other DM central banks was the catalyst to nudge yields forcefully in the direction of fair value,” JPMorgan’s strategists went on to say, before suggesting “most of the high volatility upward move in yields could be behind [us]” given “less demanding” valuations and oversold technical indicators.
The figure (above) shows outsized moves in real yields can lead to large declines for equities. Although that’s self-evident, do note it’s not an ironclad rule. It depends (heavily) on the environment. If real yields are rising because markets are “upgrading” the economy, that’s generally a good thing. If it’s all policy expectations, or some manner of mechanical move driven by a collapse in breakevens, not so much.
After noting that risk assets are currently “wrestling” with reals, JPMorgan made a few observations on the recent price action, one of which found the bank noting that the “weakness was largely confined to expensive/speculative assets like Tech and Digital assets as other risk markets like Credit and the EM complex have been more resilient.”
That’s certainly the case, although I’d be remiss not to note that value, small-caps and other cyclicals haven’t been immune. The Russell 2000 fell into a bear market briefly on Monday.
Ultimately, JPMorgan’s assessment was constructive. “A combination of technical indicators approaching oversold territory and sentiment turning bearish (AAII bulls to bear ratio in the bottom 5th %ile) suggest we could be in the final stages of this correction,” the bank said, adding that “while the market struggles to digest the rotation forced on it by rising rates, we expect the earnings season to reassure (despite the rocky start from Financials) and worst case scenario, we are not averse to the idea that the ‘Fed put’ may stage a comeback.”
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