The Kolanovic Factor

Whenever consensus turns even a semblance of cautious on equities and risk assets more generally, financial news portals tend to suggest “it’s fashionable to be bearish,” the implication being that bearish banter isn’t always fashionable.

But it is. Bearish market commentary is never out of fashion. Fear sells, after all.

There’s a difference between, one one hand, perennially bullish company analysts and top-down strategists whose year-end targets for equity benchmarks almost always suggest gains, and, on the other, mainstream media outlets whose financial fortunes depend on generating interest with bombast and the cottage industry that’s grown up around tabloid-esque coverage of economics and markets.

Sure, hyper-bullish sensationalism sells during periods of mania (e.g., the meme stock frenzy and the NFT craze), but if you want to build a durable media business around market color and macro commentary, you have to traffic regularly in fear and bearish hyperbole. Otherwise, you won’t be able to cover the overhead, let alone pay employees.

In that sense, it’s always fashionable to be bearish. And when Wall Street begrudgingly comes around to the supposed necessity of marking rosy forecasts to markets (when markets refuse to cooperate with bullish projections), the media happily embraces newly converted bears. That doesn’t mark some turning point or shift, where bears are “in the ascendancy.” It just represents analysts temporarily joining a bear train that’s always crowded.

Such is the case as we move through the back half of 2022. The sell-side is what counts as “bearish” for a bullish monolith. But not so much JPMorgan’s Marko Kolanovic who, generally speaking, remains constructive.

“The S&P 500 has seen its second sharpest P/E de-rating of the past 30 years, exceeding the typical compression seen during prior recessions,” he wrote, alongside colleagues, in a new note. The simple figure (below) shows the valuation compression.

“Although the activity outlook remains challenging, we believe that the risk-reward for equities is looking more attractive as we move through the second half,” Kolanovic added.

Needless to say, that’s not how everyone sees things. Cautiousness is pervasive, and not just among strategists typically identified with a bearish disposition.

I don’t think I’m saying anything new to suggest Kolanovic has become a somewhat polarizing figure over the past five or so years. Some of his notes during the pandemic were scrutinized and mischaracterized by commentators on both sides of what became a hopelessly contentious national argument about the effectiveness of lockdowns, and more recently, those frustrated by the resiliency of equities during the post-pandemic bull market were vexed by Marko’s refusal to adopt an overtly dour outlook in the face of policy tightening and macro headwinds. Much of the nuance in his writing (e.g., his bullish call on commodities and commodity-linked shares predicated on a prescient warning from early 2021 about an oncoming energy crisis) is lost in the fog of simplified narratives, with the current version encapsulated by this Bloomberg headline: “JPMorgan’s Kolanovic Stands Apart in Saying Stocks Will Rebound.”

Many readers likely aren’t apprised of the backstory. The obsession over Kolanovic’s near-, medium- and even long-term outlook on markets isn’t new. It dates back at least seven years, when the general investing public became aware of his penchant for correctly predicting the direction of markets based in part on dynamics that now regularly make headlines. Back then, “everyday” investors were almost totally bereft when it came to understanding the impact of dealer hedging and systematic flows on increasingly fickle markets bedeviled by a secular deterioration in liquidity. His calls seemed like magic, earning Marko various nicknames, virtually all of which referenced wizards.

In a testament to the notion that the media likes fear better than calm, some outlets eventually adopted an irritable cadence while documenting Kolanovic’s musings, apparently because not all of his notes had the ingredients necessary for bearish financial agitprop. Of course, Marko’s job description doesn’t include a mandate to produce soundbites for financial news outlets, let alone bear blogs, something he alluded to in December of 2018.

By 2021, nearly everyone had something to say about Kolanovic’s analysis. I’ve never personally witnessed a situation wherein virtually all investors, from small to large, have formed a strong enough opinion about a single sell-side analyst to foster a market-wide debate. Such is the legacy of Marko Kolanovic, and as I suggested years ago, I’m not convinced he meant for things to turn out quite that way.

Whatever the case, the obsession continued early this week, as media outlets leapt at the opportunity to pretend the latest edition of “JPMorgan View” (a collaborative weekly produced by more than half a dozen JPMorgan analysts) represents a bellowing pronouncement from “the man who moves markets,” as CNBC famously dubbed Marko.

Briefly discussing last week’s Fed meeting, Kolanovic called Jerome Powell’s press conference “not a true pivot but a sign that peak hawkishness could be behind us.” The proper interpretation of Powell’s remarks is the subject of vociferous debate. Some heard a dovish pivot, others insist Powell said nothing new by noting that the pace of rate hikes will likely slow at some point. Similarly, there’s no agreement on whether the abandonment of forward guidance was dovish or hawkish.

Kolanovic didn’t fall on one side or the other, or at least not emphatically. “Overall, we feel comfortable with seeing another 100bps in hikes by the end of this year, but it’s also important to acknowledge how market expectations are evolving,” he said. The figure on the left (below) shows the evolution. Terminal rate pricing has come in (a lot) and STIRs now expect rate cuts to commence sooner.

Recall that Powell referred reporters (and, by extension, market participants) to the June SEP, which he contended is still the best guide to the Fed’s thinking in the absence of the forward guidance they’re no longer comfortable providing. The issue is that market pricing is now very disconnected from the dots. “It will be interesting to see if this will spur some changes to the dot plot in September,” Marko said.

At the same time, policy is no longer “a long way from neutral” (to channel Powell’s infamous October 2018 quotable) and inflation expectations, both market-based and as registered by consumers in sentiment surveys, have come down. And then there’s the deceleration in economic activity. When taken together, “there is no lack of fundamental reasons for some reassessment,” Kolanovic remarked, calling both “the urgency and scope” for tightening “lower.”

On the earnings front, Marko suggested it’s priced in. “Despite bears expecting earnings to drop sharply to reflect a slowdown, stocks have bounced since the start of the earnings season, an indication that the recent worries have been fully digested,” he wrote, noting that top- and bottom-line beats have “rolled over” and now largely match historical averages.

JPMorgan proceeded to acknowledge a number of headwinds to margins, including higher labor costs implied by last week’s hot ECI data and a stronger dollar, but ultimately, their take — their holistic assessment — was benign, certainly by the standards of 2022’s bearish consensus.

“A well behaved roll-down in the jobs numbers into year-end and a moderation in inflation would indicate the Fed has achieved its objective, whereas a sudden upward jolt in the claims numbers would send a bad message,” Kolanovic wrote, before wrapping it all up as follows:

The cross-asset valuation metrics reflect this balance of risks, and the positive interpretation of the resulting wider stock vs bond risk premium is that it can revert as cross asset volatility levels decline, which seems warranted as the Fed’s path seems clearer. Whether it’s earnings, the Fed, or the economy, the recent headwinds are fully priced in which should reset investors’ expectations, moderate volatility, thus allowing the currently wide risk premia to come in.

I’d note, in closing, that the past ~five years are replete with examples of consensus turning bearish (or as “bearish” as the sell-side is inclined to be during moments of acute market angst) and Kolanovic sticking to a constructive view which eventually turned out to be correct.

In early 2019, following the worst December for US equities since the Great Depression, Kolanovic suggested stocks would be back to records by summer. They were. Following the pandemic plunge, Marko said stocks would be back to records in short order. And they were.

As Bloomberg pointed out Tuesday, Kolanovic was voted the No. 1 equity-linked strategist in last year’s Institutional Investor survey.

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