- Investors should buy stocks as the Fed will pivot and the global economy will avoid a recession, according to JPMorgan’s Marko Kolanovic.
- Kolanovic expects inflation to “work itself out” as pandemic-related distortions start to fade.
- “The Fed has overreacted with a 75 bps hike. We are likely to see a Fed turnaround, which is positive for cyclicals,” Kolanovic said.
Sky-high inflation is not scaring away by JPMorgan Marko Kolanovic from his bullish view on the stock, according to a Monday note from the bank.
Kolanovic said investors should buy stocks because “inflation will work itself out” as distortions related to the COVID-19 pandemic fade. As inflation slows, that should result in a Fed pivot, which would be positive for cyclical assets, according to Kolanovic.
“Given the delay it takes for rate hikes to work through the system, and with only a month to go before very important US elections, we think it would be wrong for the Fed to increase the risk of an aggressive policy mistake and put jeopardize the stability of the market”. Kolanovic said, adding that the Fed has already overreacted with its 75 basis point rate hikes.
But Tuesday’s CPI report, which showed prices rise more than economists expected in August, solidifies the Fed’s decision to raise interest rates by at least 75 basis points at its FOMC meeting next week.
The Consumer Price Index gained 8.3% year over year in August. The reading showed inflation slowing from the previous pace of 8.5%, but falling short of the consensus forecast of 8.1%. Falling gasoline prices offset rising costs for food, new cars and heating, according to the report.
After the Fed rate hike in September, Kolanovic expects the central bank to “become more balanced” as it weighs future rate hikes against signs that inflation may be slowing thanks to lower commodity prices.
Still, despite continued elevated inflation readings, Kolanovic believes there is plenty of upside potential left for stocks because a global recession will be averted and investor confidence remains low.
“Our expectation that the global economy will stay out of recession, increased fiscal stimulus, and still very low investor sentiment and positioning should continue to provide tailwinds for risk assets, despite more rhetoric. central bank recently,” Kolanovic said.
In terms of investor positioning, it remains around the 10th percentile for both systematic and discretionary mutual funds, according to Kolanovic. That suggests that any change in sentiment would create a lot of buying pressure from investors who are currently underweight equities.
Finally, what is encouraging for bullish investors like Kolanovic is the fact that corporate earnings continue to defy economic momentum and remain quite resilient to broader macro trends.
“Earnings revisions are back up, divergence from PMIs continues, which is unprecedented. We think this can hold and we think any earnings drop could be smaller than is typical in a recession,” Kolanovic said. .
While many feared a Earnings decline in the second quarter, that failed to materialize, and third-quarter earnings are now expected to remain slightly positive. As long as corporate earnings remain resilient, so should the stock market, according to Kolanovic.