JPMorgan’s Kolanovic calls the latest stock rally a bear market trap

(Bloomberg) — JPMorgan Chase & Co. strategist Marko Kolanovic reiterated on Monday that investors should soften last week’s Federal Reserve-induced stock market rally, arguing the U.S. economy’s disinflationary process may be only “transient.” “.

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Kolanovic sees the first three months of the year likely to mark a “turning point in the market,” with a pocket of air during the second and third quarters, he wrote in a note to clients. This will be followed by renewed deterioration in fundamentals through the end of the year as the central bank is likely to keep interest rates high for some time, he added.

“We recommend using current strength to reduce exposure,” wrote a team of strategists led by Kolanovic, indicating how investors have piled into speculative assets from cryptocurrencies to meme stocks.

A strong job market could be a shot of cold water for a “soft landing” scenario, in which the Fed tames inflation while the economy continues to grow. If that doesn’t materialize, it will result in a reversion to the mean among this year’s equity winners, according to Kolanovic.

After the surge in payroll growth on Friday raised concerns that speculation about a Fed pivot was premature, Kolanovic now expects two more rate hikes in March and May, each by a quarter of a percentage point, followed by a long break. Even with inflation easing, he expects high wages to weigh on margins, threatening more layoffs in Corporate America.

“So disinflation in this situation will be nothing to celebrate, as it leaves rates in an even tighter state with central banks slow to change course unless a risk event forces a reset,” Kolanovic said.

One of Wall Street’s biggest optimists during much of last year’s market sell-off, most of Kolanovic’s 2022 calls didn’t work out. He has since reversed his view of him, cutting his equity allocation in mid-December due to a weak economic outlook for this year. Last month, he said the economy was headed for a recession. The bank reduced its recommended equity allocation yet again on fears of a recession and excessive central bank tightening.

Kolanovic, however, urged investors to buy Chinese stocks short during their October downturn, a request he got right as the MSCI China index has gained more than 26% since the start of October.

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