Now is the time to buy stocks as inflation will resolve itself and the global economy will avoid a recession, JPMorgan's Marko Kolanovic says
- 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 "resolve on its own" as pandemic-related distortions begin to fade.
- "The Fed has over-reacted with 75bps hike. We will likely see a Fed pivot, which is positive for cyclical assets," Kolanovic said.
Sky-high inflation isn't scaring away JPMorgan's Marko Kolanovic from his bullish view on stocks, according to a Monday note from the bank.
Kolanovic said investors should buy stocks because "inflation will resolve on its own" as distortions related to the COVID-19 pandemic fade away. As inflation slows, that should result in a Fed pivot, which would be positive for cyclical assets, according to Kolanovic.
"Given the lag it takes for rate hikes to work through the system, and with just one month before very important US elections, we believe it would be a mistake for the Fed to increase risk of a hawkish policy error and endanger market stability," Kolanovic said, adding that the Fed already over-reacted 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 prior pace of 8.5%, but missing a consensus forecast of 8.1%. Falling gas prices offset rising costs of food, new cars, and heating, according to the report.
After the Fed's September rate hike, Kolanovic expects the central bank to "become more balanced" as it weighs future rate hikes against signs that inflation could be easing thanks to lower commodity prices.
Still, despite the continued readings of elevated inflation, Kolanovic thinks there's plenty of upside left for stocks because a global recession will be avoided and investor sentiment remains in the dumps.
"Our expectation that the global economy will stay out of recession, increasing fiscal stimulus, and still very low investor positioning and sentiment should thus continue to provide tailwinds for risky assets, despite the more hawkish central bank rhetoric recently," Kolanovic said.
In terms of investor positioning, it remains around the 10th percentile for both systematic and discretionary investment funds, according to Kolanovic. That suggests any reversal in sentiment would spark big buying pressure from investors who are currently underweight equities.
Finally, what's encouraging for bullish investors like Kolanovic is the fact that corporate earnings continue to defy economic momentum and remain fairly resilient to broader macro trends.
"Earnings revisions have moved higher again, the divergence with PMIs continues, which is unprecedented. We think that this can stay the case, and believe that any earnings downside could be less than is typical in a recession," Kolanovic said.
While many feared an earnings decline in the second-quarter, that didn't materialize, and now third-quarter earnings are expected to remain slightly positive. As long as corporate earnings remain resilient, so to should the stock market, according to Kolanovic.
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