If you’re curious, JPMorgan’s Marko Kolanovic still harbors reservations about the risk-asset rally.

“Global equities continue to drift higher in an almost straight line since the end of last October, defy[ing] our expectation of a correction,” analysts including Kolanovic wrote, in their weekly research digest.

It’s true. The rally from the October lows, sparked during the first week of November by Janet Yellen and Jerome Powell, looks a lot like a straight line.

In fact, global equities have only logged three weekly declines since October, if you can believe it.

That’s vexing for bears. I don’t see any way around that evaluation. This is, simply put, one of the most inexorable risk-asset rallies in living memory, and as Kolanovic noted, it’s driven credit spreads to levels observed on the eve of crises and around periods of speculative excess.

I highlighted the figure below a couple of weekends ago. I’ll use it again here.

Spreads have rarely been narrower. The compression leaves little room for error on some interpretations, including Kolanovic’s.

“Ultra-low credit spreads add to market frothiness and in our opinion offer little compensation in a backdrop of 3% default rates,” he said. He cited JPMorgan’s high yield team in noting that actual defaults reached a post-pandemic high last month. (Measured by volume affected, defaults and distressed transactions hit a 10-month high in February.)

In a recent edition of his “Flows and Liquidity” series, JPMorgan’s Nikolaos Panigirtzoglou assessed the situation via the “risk-return tradeoff line.” Technically, it’s the regression line of the IRR for different assets. More colloquially, it’s “an alternative way to look at risk premia,” as JPMorgan put it. The figure below shows the slope.

“The slope appears to have been on a declining trend since the Lehman crisis [and] currently stands at 0.09,” Panigirtzoglou noted. That’s the expected Sharpe Ratio embedded across assets, he went on, explaining that it’s “well below its historical average since 1989” and is now consistent with 2007 and 1999 levels. Market participants, then, are staring “at the frothier risk premia backdrop of previous cycle peaks.”

Kolanovic summed it up in layman’s terms. Everything above (and a lot of other things besides) suggests “risk premia have compressed by so much over the past few months that both equity and credit investors look vulnerable to potential normalization,” JPMorgan said, on the way to recommending investors “hedge their risk assets via long vol exposures.”

I sympathize with the sentiment. But… well, you can bleed to death running long vol exposures depending on how you structure them and what your goal is. If you just want a hedge against a risk-asset correction, the good news is that downside’s rarely been cheaper.

Don’t forget, though: There are structural factors weighing on vol, including massive supply from the proliferation of buy-write ETFs, where AUM has ballooned at a spectacular rate.

For their part, JPMorgan doesn’t see any crash risk from those products, but did note that “in case of a large market selloff, the volatility suppressing force from these [ETFs] is likely to quickly disappear, leaving markets more vulnerable to other selling flows.”