JPMorgan Chase’s strategist Marko Kolanovic reiterated on Monday that investors should fade last week’s Federal Reserve-induced stock-market rally, arguing that the US economy’s disinflationary process could just be “transitory”.
Kolanovic sees the first three months of the year likely marking an “inflection point in the market,” with an air pocket during the second and third quarters, he wrote in a note to clients. That will be followed by renewed deterioration in fundamentals through the end of the year since the central bank is likely to keep interest rates high for some time, he added.
“We advise to use the current strength to reduce exposure,” a team of strategists led by Kolanovic wrote, pointing to how investors piled back into speculative assets from cryptocurrency to meme stocks.
A strong labour market could be a dose of cold water for a “soft landing” scenario, where the Fed tames inflation while the economy continues to grow. If that does not come into fruition, it will result in a mean-reversion across this year’s equity winners, according to Kolanovic.
After a surge in payroll growth on Friday raised concern that speculation about a Fed pivot was premature, Kolanovic now expects two more rate hikes in March and May, each by a quarter percentage point, followed by a lengthy pause. Even with headline inflation ebbing, he anticipates that elevated wages will weigh on margins – threatening more lay-offs across Corporate America.
“So disinflation in this situation will not be anything to celebrate, as it leaves rates in an even more restrictive state with central banks slow to change course unless a risk event forces a reset,” Kolanovic said.
One of Wall Streets biggest optimists through much of last year’s market sell-off, most of Kolanovic’s 2022 calls did not work out. He has since reversed his view, cutting his equity allocation in mid-December due to a soft economic outlook for this year. Last month, he said the economy was headed for a downturn. The bank reduced its recommended equity allocation once again due to fears of a recession and central-bank overtightening.
Kolanovic, however, did urge investors to buy the dip in China equities during their October downturn, a call he got right as the MSCI China Index has gained more than 26 per cent since early October.