If you were wondering, JPMorgan’s cross-asset strategy team is still cautious on equities.
That probably goes without saying by now. The bank’s harbored the same set of doubts about the rally, the economy and the fraught state of global affairs, for around 18 months. At least.
Those concerns have only grown over that period, even as US equities pressed ever higher on the way to more than two-dozen new records in 2024.
Analysts led by Marko Kolanovic reiterated their defensive stance this week, where that means they’re Underweight equities and Overweight commodities and cash in their model portfolio. Stocks, the bank said, became even more disconnected from bonds post-US payrolls.
“We see diminished prospects for easing this year, and now expect the first Fed cut only in November,” an asset allocation update read.
JPMorgan was one of two major banks clinging to a July Fed cut call headed into the May jobs report. When the headline NFP print topped every estimate in Bloomberg’s survey, I said those calls (for a July cut) would be abandoned. And they were.
Equities were undeterred by the robust release despite the read-through for monetary policy. The market’s priced for just ~37bps of easing this year. Traders had all but fully priced two quarter-point reductions (i.e., 50bps) amid a run of softer data headed into payrolls. The hot NFP headline and a warm read on wage growth prompted another rethink.
Wednesday’s FOMC meeting will ostensibly help traders refine their expectations. The new dot plot will see the median 2024 marker shift up to reflect either two or one rate cut this year versus the three tipped by the last two SEPs.
But it’s not just rates stocks are looking past, according to Kolanovic. “Additionally, equities seem to be ignoring politics, geopolitics, narrow market concentration, the surge in meme stock and crypto trading that may signal froth and a number of macro signals that are pointing to elevated risks of an economic slowdown or recession,” he said.
The bank also weighed in on elections in India and Mexico. “The common theme… is that polls are less reliable and thus elections surprises are more likely,” Kolanovic and co. wrote, calling last week’s events “warning signs for the coming parliamentary elections in France, the UK general election in July and the US presidential election in November.”
OTOH, if politics is only reacting to the idiocy of voters but the economy is basically fine or better than fine in some parts (tech…) then it kinda makes sense for equities to ignore political turmoil.
Apple EPS doesn’t care if women are forced to keep pregnancies they don’t want and trans are barred from their preferred bathrooms…
It is impossible for many traders and investors to envision a bear market. The algos running the 0DTE programs don’t care about uncertainty beyond a few minutes, and many PMs and investors can’t (or won’t let themselves) imagine that uncertainties (a/k/a “risks”) may lead to sharp declines in equities. Today’s self-proclaimed “long-term” investors will be challenged to maintain that perspective when the market finally rolls over. Or drops like a rock and doesn’t bounce. Brings to mind Tyson’s oft quoted comment about everyone having a plan until they get punched in the face. And Buffett’s comment about what is revealed when the tides goes out. Greed rules for now but it will be ugly and scary when markets are turning many traders and investors into humans again.
I would also add a Putin / MBS / Netanyahu / Yemen related oil price shock to the list of risk factors…
CRE and bank failure risk are still out there too.
Well, I suppose Kolanovic did call the market’s pandemic bottom….
He’ll be right again — eventually.
Investors aren’t overlooking risks of domestic or geopolitics, volatility in Treasuries, unpredictable bond auctions, accelerating deficit spending, recalcitrant inflation, increasing economic inequality, FED policy mistake, possible recession etc. Because investors are aware of and concerned about all these risks, they are allocating capital to liquid megacap stocks of companies with secular growth and solid earnings visibility supported additionally by dividends and buybacks: NVIDIA, APPLE, MSFT. These 3 stocks have become the safety trade since the April’ 24 downdraft in the indices since they are largely unperturbed by the vagaries of inflation, FED policy etc.. One could easily argue that these three stocks over the last two years have less downside volatility than US Treasury bonds. I think the narrow leadership will persist until after the election.
Interesting idea.