It’s been a tough year for anyone determined to stick with a bearish call on US equities. The same is true of defensive portfolio allocations in general.

Discretionary investors holding out for a recession that never came were seemingly forced from the sidelines over the past two months. Various positioning indicators and options metrics pointed to a panic grab for exposure into a melt-up that refused to abate.

Not even the highest real yields in a dozen years managed to take the shine off — to a certain extent, higher reals are being viewed as a favorable referendum on the outlook for the economy, although there’s certainly a term premium story too.

On Monday, JPMorgan analysts led by Marko Kolanovic reiterated their defensive stance on equities and credit, while conceding it hasn’t served them especially well. “This defensive stance has not played out and as a result we suffered a significant loss in our model portfolio YTD given the strong rally,” they wrote, adding that a defensive bias “has been even more challenged in recent weeks as ‘soft landing’ became the dominant narrative among clients and market participants.”

If you’ve been following along this year, you know what’s coming next: JPMorgan doesn’t agree with the soft landing view, even as the bank’s Michael Feroli did drop his recession call for 2023 last week.

Kolanovic and co. on Monday enumerated the reasons for sticking with a defensive stance in both equities and credit. There are nine of them.

The first is just that recession risk is priced out of most assets. “Equity valuations are pricing in an even more optimistic scenario than a soft landing — akin to a continued expansion and simultaneous monetary easing,” they said, suggesting that’s optimistic to the point of being unrealistic.

Second, the bank said the “full effects” of tighter financial conditions may take some time to work their way through, and “look set to reverberate” in the back half of this year, and into the first half of 2024.

Third, a meaningful increase in volatility risks an exposure unwind from vol-sensitive investor cohorts who Kolanovic said have been “mechanically propping up the equity market for most of this year.” That’ll sound familiar to regular readers. I bring it up all the time, most recently a few days ago here. A persistent increase in volatility would put those strategies at “risk of de-leveraging,” Marko reiterated.

Fourth, defaults are up. The figure on the left below shows $42.2 billion across bonds and loans. When you throw in more than $13 billion in distressed exchanges, you get more than $55 billion, a figure which exceeds last year’s full-year total and looks poised to be the third-largest annual sum ever.

Fifth, earnings “beats” are hard to assess given the dynamics discussed in “Good Game!” JPMorgan was diplomatic about it, but made the same general point. “It is difficult to assess the true degree of earnings surprises in reporting season given systematic biases in bottom-up analyst forecasts and company guidance,” the bank remarked. “In our mind the big picture remains that both revenue and earnings growth is on a downtrend.” You can see that in the figure on the right, above.

Sixth, valuations are very stretched. At over 20x, the S&P trades above its 10-year average, and you can say something similar about credit. Spreads are tight versus history.

Seventh, there’s the bear steepener, which I (jokingly) suggested might be the most important thing in the entire universe on Monday. “The bear steepening and the renewed rise in government bond yields is posing a valuation challenge for both equities and corporate bonds,” JPMorgan said.

Eighth, cash still yields 5%. As long as that’s the case, USD cash is a viable asset class, particularly given that government money market funds are riskless (Fitch’s opinion aside) and many high-yield savings accounts are FDIC insured.

Finally, ninth, there’s the BoJ’s YCC tweak. “The BoJ policy change could prove an inflection point for carry trades globally if it is seen as the first step towards exiting negative rates,” JPMorgan’s team wrote.

Is all of that convincing? Yes and no. Yes, because it’s perfectly reasonable, plausible and rational. No, because as one US rates team eloquently put it last week, “As we ponder the sustainability of real rates this high, we cannot help but feel that we’ll see either lower reals or lower equity prices — even as Keynes’s wisdom concerning rationality and solvency dance in our heads.”