Need to Know: This superbull at JPMorgan who called the summer rally sees a soft landing ahead. Here’s his advice on stocks and oil.
A fifth-straight win was taken off the table after August CPI numbers surprised on the upside.
And it looks like there’s nothing to sway the Fed from a 75-basis-point hike this month. Still, when it does look like CPI is peaking, our chart of the day below has some good news for investors.
Onto our call of the day, which comes from one of Wall Street’s staunchest bulls, JPMorgan’s Marko Kolanovic, who is betting on a soft landing for the global economy. The chief market strategist was spot on with a call for stocks to rally this summer, and was heard last month telling investors to hang on, as the gains aren’t over.
For starters, investors need to trust the data more and obsess over central banks less, he says.
“We maintain that economic data and investor positioning are more important factors for risky asset performance than central bank rhetoric. And the data appear to be increasingly supportive of a soft landing (rather than global recession), given moderating inflation and wage pressures, rebounding growth indicators, and stabilizing consumer confidence,” Kolanovic told clients in a new note.
He sees a global recession as avoidable owing to expectations China and Europe will support their needy economies. Low investor positioning and sentiment should also “continue to provide tailwinds for risky assets, despite the more hawkish central bank rhetoric recently.”
Among those assets, JPM is keeping an “aggressive overweight” in commodities and commodity-sensitive assets, due to a supercycle thesis and to hedge for inflation and geopolitical risks.
Kolanovic suggests buying the dip on energy as there is no solution to Europe’s current crisis in sight and markets are yet to price in weaker prospects for an Iran nuclear deal or G-7 progress on Russian oil price caps.
He is also staying bullish on equities, specifically cyclicals, small-caps and EM/China over expensive defensives.
Unlike energy, “defensive industries have outperformed on multiple expansion and are trading at near record premium vs. the market,” said the strategist who adds that central bank tightening and labor resiliency may keep rates higher for longer, capping multiples for long-duration growth and tech.
Midterms are also weighing into the bank’s equation for riskier assets. “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,” said Kolanovic.
Post data, stock futures ES00,
Ouch. September CPI rose 0.1% on the month, above expectations, while core CPI — stripping out food and energy— climbed 0.6%. On an annual basis CPI slowed to 8.3% — less than epxected — from 8.5%. Ahead of that, the latest small-business sentiment index showed a rise in confidence. The Federal budget is due later.
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In five of seven historical inflationary surges, “the S&P 500 either bottomed coincident with or in advance of the ultimate inflation peak,” says Jim Paulson, chief investment strategist of The Leuthold Group.
Among the exceptions, in one instance the stock market moved sideways for months after that peak, though didn’t see big moves lower. And in 1970, stocks moved south even after that inflation high, though downswing was brief and the S&P 500 fully recovered after a few months, notes the strategist.
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