JPMorgan’s Marko Kolanovic wants to “set the record straight.”
Over the course of 2022, the mainstream financial media (and, I assume, a handful of alternative outlets), have been keen to juxtapose JPMorgan’s relatively (and consistently) constructive take on US equities with more bearish commentary emanating from some of the bank’s peers.
Increasingly, such coverage describes Kolanovic as an outlier. Implicit in the same coverage is the notion that JPMorgan has been proven “wrong” and bearish projections “right.” I’ve endeavored to dispense with such notions for a variety of reasons, including, but not limited to, the fact that the year isn’t over and that, in many cases, media outlets appear to be chasing web traffic by way of simplified, nuance-free “hot takes” aimed at perpetuating the above-mentioned “outlier” narrative.
On Thursday, Kolanovic pushed back. “While the perception is that bears were vindicated this year, one should keep in mind that price targets are for year-end, and not intra-year lows,” he wrote, in a note from his own desk. Price targets, he added, “shouldn’t be changed many times intra-year as it defeats the purpose of forecasting.”
That latter point is important and it often gets short shrift. While we’re all fond of the old “when the facts change” adage, a forecast isn’t a forecast if it’s marked to market every few weeks. Claims of prescience are meaningless if the ostensible seer is constantly changing his or her prophecies based on events as they transpire.
Beyond that, Kolanovic noted that at ~4,300, the S&P is roughly 10% away from JPMorgan’s year-end target, “less than one standard deviation based on the current market volatility and the appropriate time horizon.” 3,500, which he called “the most common ‘bearish’ target” is around two standard deviations away. The implication is clear.
Further, Kolanovic took aim at the purported wisdom of waiting on lows that are never realized to start buying. “Buying 2% dips (from e.g. trailing one-week highs) would produce a 3% return, buying 3% dips would produce a 5% return and so on,” he wrote, adding that “buying on weakness so far yielded positive returns and has worked better, than suggestions to stay out of the market and start ‘nibbling’ at levels that have not been reached.”
Marko’s cadence was matter-of-fact, but it’s delightfully barbed if you’re steeped in the prevailing narrative. The idea that investors should wait on 3,500 or lower to begin “nibbling” at equities is ubiquitous in sell-side research this year. The word “nibble” (or some variant) is a mainstay of 2022 bear market strategy pieces. Sure, it sounds “wise,” but when you think about it, it’s not worth much. You don’t need to be a professional to know that a ~30% drop on the S&P might represent an opportunity to “nibble.”
He continued. JPMorgan hasn’t advocated indiscriminate buying of US equities. That was never their call, although you wouldn’t know it based on the way the mainstream financial media presented their outlook. “We remain open to a possibility that the final S&P 500 price slightly underperforms our target,” Kolanovic said Thursday, before reiterating that the bank “continue[s] to advocate staying away from expensive defensive segments” and noting that his bullish call on energy (which dates back further than the vast majority of such calls) was plainly borne out.
Kolanovic did concede that the bank didn’t expect 75bps rate hikes and thought China might ease more decisively, but he reminded investors that JPMorgan long ago called for high and persistent inflation, in part due to a hyper-bullish commodity thesis (outlined on innumerable occasions) which proved prescient. That call was out of consensus at the time, and now, the bank is again out of consensus in expecting inflation to “resolve on its own as distortions fade.”
“The Fed has overreacted with 75bps hikes,” Kolanovic wrote, adding that the Fed “overreaction and a subsequent, but largely unrelated, decline in inflation, will likely result in a Fed pivot, which is positive for cyclical assets.” He also suggested that very much contrary to the prevailing market narrative, the Chinese economy may still stage a strong recovery, as “the recent softening of economic data should increase a sense of urgency to provide stronger and broader set of stimulative measures.”
If you believe, as Kolanovic does, that a global recession won’t happen and that inflation will resolve on its own, the most important factor going forward is positioning. And, as any regular reader knows, positioning remains very light. The surge from the June lows in US equities was in part a function of under-positioning getting squeezed by a mechanical rally that ran away to the upside, forcing funds to chase.
“Positioning is still very low for both systematic and discretionary funds,” Marko said, adding that declining realized volatility “supported by structural factors such as gamma positioning” has facilitated re-leveraging from systematic investors.
Let me emphasize: There’s no debate about that. It’s a fact. I’ve been over it in these pages countless times over the past month. I’ve also suggested that such re-allocation flows have further to run assuming no big shocks (i.e., assuming no left-tail events that push spot abruptly lower and vol sharply higher).
Marko concurs, apparently. “Alongside buybacks, these strategies can provide steady inflows of several billion per day in equities for the next 2-3 months,” he wrote, noting that CTAs, which were short stocks, are covering and if the S&P 500 can push through key levels and trigger momentum signals, that could catalyze “significant” additional inflows, which he estimated at ~$100 billion.
On the Fed, Kolanovic expressed guarded optimism on the prospects for a relatively benign August CPI report (where that just means a print that isn’t a disaster, about the best we can all hope for under the circumstances), an outcome he said could “provide room for a market-friendly” September FOMC meeting.
“Given the lag it takes for rate hikes to work through the system, and with just one month before very important US elections, we believe it would be a mistake for the Fed to increase risk of a hawkish policy error and endanger market stability,” he said.
