Many market indicators are pricing in a recession, J.P. Morgan strategists said. But they don’t see one coming.
The recent drop by stocks went too far, given economic fundamentals, presenting investors with a good buying opportunity, according to J.P. Morgan.
The S&P 500 fell 5.3% in January.
“The equity market sell-off is overdone in our view, and we reiterate our call to buy the dip, particularly in cyclicals and small-caps,” wrote J.P. Morgan strategists led by Marko Kolanovic. “Stocks are in bear market territory and erased their post-pandemic re-rating, small-cap valuations are at 20-year lows, and investor sentiment is bearish.”
Many market metrics are pricing in a recession, the strategists said. But they don’t see one coming. Many investors also are worried about the impact of coming interest rate hikes expected from the Federal Reserve.
“While jitters around a Fed hiking cycle are understandable, this has been magnified by technical factors that can change quickly,” the strategists said.
“We could see a reversal of systematic outflows, pick-up in buyback activity as we exit blackout
windows, and magnification of flows by weak liquidity and short-gamma hedgers.” Gamma hedging involves the use of options to hedge against moves in underlying securities.
And while J.P. Morgan economists forecast the Fed will raise rates five times this year, “we think the risk is that inflation-related data improve and fewer hikes are ultimately delivered,” the strategists said. They noted that Fed Chairman Jerome Powell’s comments last week were more hawkish than the central bank’s policy statement.
“Medium-term, we favor China, emerging market, eurozone and U.K. equities versus the U.S., given growth convergence, interest rate sensitivity, attractive valuations, and favorable positioning,” the strategists said.
