Roses are red, violets are blue, will CPI turn into the stock market’s Waterloo?
The inflation data showed higher prices remain sticky, even if overall pressure eased a bit. The stock market seems to be in for a choppy day of action.
Playing a sizable role in new year gains has been tech, though last week wasn’t great. Filings from hedge fund and other big money manager’s 13-F filings showed Soros Fund Management buying beaten-down shares of Tesla while manager Seth Klarman increased stakes in Amazon Alphabet and Meta
That is backward looking, but one wonders if they have kept that momentum up. Caution is the rule for our call of the day, from a team led by JPMorgan’s top strategist Marko Kolanovic, who says it’s time to stop buying U.S. stocks as investors overprice recent good news on inflation and remain “complacent of risks.”
“We believe that the equity rally is unlikely to get the fundamental confirmation for the next leg higher. Once positioning recovers, Q1 is in our view likely to mark the high point of the market. We think that one should be using the [year-to-date] gains to cut equity allocations, and to reduce portfolio beta,” said Kolanovic and the team.
They say international equities — China/EM, Japan and Europe — “offer better risk-reward than U.S. equities.” This latest warning adds emphasis to Kolanovic’s assessment last month that the rally’s days were numbered.
Now hold on you say? Wasn’t this the guy who was bullish all of last year, to no great end? In JPMorgan’s defense, they say an underweight position on government bonds and overweight on commodities compensated for 9-month equity overweight last year, helping them edge past the benchmark.
Still, Kolanovic might have a lot riding on this bet, as others on Wall Street chime in. Chris Montagu and the team at Citigroup, for example, told clients they see fading bullish momentum for stocks, apart from European banks.
What JPM sees hurting this rally is recent weaker economic data and the anticipated weak earnings and guidance from the latest reporting season. “Recent equity inflows are likely running out of steam, while pensions’ overfunded status could drive an increase in their reallocation from equities to bonds this year,” they said.
Markets are neither pricing in a recession, and trading as if the energy crisis, Ukraine war and sharp monetary tightening never happened, says Kolanovic. So they are shifting more defensively, moving slightly overweight on government bonds.
They are also tilting investments to benefit from China reopening tailwinds — overweights in commodities, mostly energy and EM equities. Note, Bank of America’s latest fund manager survey revealed that bullish China equity positions linked to that reopening are considered to be the most crowded trade out there right now. Tread carefully.
Stocks are swinging around, pushing a bit lower post data as investors digest that CPI data. Bond yields are moving higher, while the dollar flattens out and oil prices extend losses.
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CPI rose 0.5% in January, slightly above forecast, while it dropped to 6.4% on an annual basis, from 6.5% and against forecasts for a gain of 6.2%. Core CPI rose 0.4% and decelerated to 5.6% from 5.7%, against an expected 5.4%. More details here. Elsewhere, a survey showed small-business sentiment ticked up in January.
Ford is cutting 3,800 European jobs amid a shift to electric-vehicle production.
Coca-Cola stock is up after beating revenue forecasts, while Marriott shares are up after the hotel chain’s forecast beating results and upbeat outlook. Akamai Technologies and Agilent are reporting after the close.
Palantir Technologies stock is up 16% after the software company reported its first profitable quarter. Avis Budget shares are up 5% after the rental car group posted higher revenue. IAC/InterActiveCorp. stock is up after the brand holding company topped earnings expectations.
T2 Biosystems shares are down 7% after the diagnostics company announced a public offering of common stock and warrants. It also reported positive data from T2Biothreat Panel that quickly detects biothreat pathogens.
President Joe Biden is set to name Federal Reserve Vice Chair Lael Brainard as his economic-policy coordinator.
Moldova temporarily closed its airspace, a day after its president accused Russia of plotting to overthrow the government.
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As JPM pointed out, the market is behaving as if a war is not happening. Of course, it is over there, and really in the bull’s-eye more for Europe than the U.S., which has China and balloons to worry about. But here’s a chart from that Bank of America survey of fund managers that offers some food for thought.
It shows that sticky, high inflation remains the biggest tail risk for investors, that is an event with a low probability of happening, but if it does, the damages could be outsize for markets. The second-biggest is geopolitics, and that’s as doubts grow of a peace accord between Ukraine and Russia in 2023 (expectations now down to 50% from 63% in January).
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