Stocks could continue to rise despite the Fed’s hawkish stance and treasury yields reversals, according to JPMorgan Chase & Co Strategist Marko Kolanovic.
Kolanovic and his team, in an information note to customers, took a pro-risk stance by saying, “If there is too much talk about the markets, it may not be complacency, but negativity.” The team offered three reasons for their optimistic views.
First, stock and bond markets have historically performed well at the beginning of monetary tightening cycles.
Second, the team stresses that even if nominal bond yields and rates rise, “the real policy rate is too negative and expansionary” and it is too soon to perceive a bond yield reversal as a signal of recession.
Finally, it is pointed out that, unlike many central banks that implement monetary tightening, it seems likely that stocks in these countries will be supported by monetary expansion, as the central banks of Japan and China act as expansionists.
Stock markets on both sides of the Atlantic quickly rebounded from the selloff triggered by the Russian invasion of Ukraine and retraced this year’s losses.
Equity market is more resilient than expected
While the spike in commodity prices and a reversal in parts of the US Treasury yield curve raise concerns that an economic slowdown is imminent, the deterioration is mostly affected the bond markets, and stocks have so far been unaffected by recession risks.
While the resistance in the stock market surprised stock market strategists such as Morgan Stanley’s Michael Wilson and Bank of America’s Michael Hartnett, who thought that the rally should be used as a sell-off opportunity, the JPMorgan team said that economic indicators so far exceeded expectations and that there is a potential for a sell-off. argues that it is too early to take a position based on recession.
In their notes, “These positive economic surprises are likely to turn into earnings surprises in the coming period”, the team said, “Barriers to the income reporting season in the US, which will start in about two weeks, due to the expectation of a wide sequential decline in S&P 500 profits.” It seems pretty insignificant.”