A rally in the stock market is imminent after investors got too bearish, JPMorgan’s Marko Kolanovic said.
The AAII investor sentiment survey fell to a 30-year low, with just 16% of respondents feeling bullish about stocks.
Kolanovic said inflation will moderate thanks to year-over-year base effects and COVID-19 receding.
The stock market is poised for a near-term rally after investors turned too bearish on stocks, JPMorgan’s Marko Kolanovic said in a note on Tuesday.
Kolanovic pointed to the latest results of the weekly AAII investor sentiment survey, which showed that bullish respondents plunged to a 30-year low of just 16%. And there’s plenty for investors to be worried about, from surging inflation and interest rates to the ongoing war between Russia and Ukraine.
Even Kolanovic himself recommended investors take profits and cut their equity exposure in a note earlier this month. But that doesn’t mean JPMorgan’s quant guru is bearish on stocks.
“While we slightly reduced our record equity allocation, we remain constructive on equities and think that a near-term rally is likely,” Kolanovic said.
Part of that upside will be driven by a moderation in inflation, according to Kolanovic, which should begin to happen soon. And a slow-down in inflation would put downward pressure on interest rates, thus helping put upward pressure on stock prices.
“Last year, we were among the first to point to significant inflation upside, but now think that some leveling off will happen due to the transitory nature of the COVID impact, underappreciated YoY base effect, and softening demand as growth slows down,” Kolanovic explained.
If those imbalances work themselves out, some expected interest rate hikes by the Federal Reserve could get priced out of the curve, “especially as we get closer to midterm elections,” Kolanovic said, hinting that interest rate hikes may be on pause during the late summer and early fall.
Investors can position their portfolio for upside by buying both growth and value stocks, according to Kolanovic, who highlighted that some growth stocks are now so cheap that they’re value stocks, and vice versa.
Specifically, energy and mining stocks that have been traditionally categorized as value are now growing their earnings considerably as commodity prices spike. And some growth stocks have sold off so far that they’re valuations are now categorized as cheap.
“One can construct a ‘barbell portfolio’ of traditional growth (e.g., tech, biotech, innovation) and traditional value stocks (e.g., metals, mining) that currently have favorable attributes across most traditional factors,” Kolanovic said.
“This is rarely the case and currently possible due to a specific confluence of macro factors such as the commodity supercycle, divergent monetary policy, and very large selloff in high-beta and growth stocks in the first quarter,” Kolanovic concluded.
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