Fra JP Morgan
Are there any catalysts on the horizon that Kolanovic is concerned about: the answer, at least until the presidential election, is no: “BOJ and Fed outcomes were dovish. Between central banks and reduced leverage in systematic strategies, major risks for the markets are removed near term. The next major catalysts are US Elections and central bank meetings such as December Fed (which we will address below).”
Notably, having previously warned about potential selling overhang, this time Kolanovic urges JPM clients to go into some of the most risk-on assets they can find, although notes that “upside for the whole S&P500 is likely not large given already high valuation”… although when is the last time record PE multiples stopped algos from buying:
Short term, we favor a continuation of Value, Carry, and Reflation ‘risk-on’ trades that include long EM stocks, Commodities, and DM stocks that have cheap valuations (we advocated those since December last year, see here). Short term upside for the whole S&P 500 index is likely not large, given already high valuations (e.g. yield sensitive and low volatility stocks) and uptick in market volatility.
What is curious is that unlike others, Kolanovic is not even concerned about the outcome of the presidential election, saying that a Trump win is not a risk for equity markets:
As we indicated in our previous reports, and counter to various surveys, the outcome of US elections appears to be largely a coin-toss. This is increasingly supported by national polls and electoral vote probability distributions, most of which are within the margin of error. While the prospect of Trump winning the election may be unnerving for some investors (especially those overseas), we do not think that Trump’s potential win is a risk for equity markets. In fact, certain structural effects may even result in short-term upward pressure on equities. There is a close analogy between Brexit and the US elections, in our view. In the Brexit case, the establishment underestimated the probability of losing the referendum, but overestimated its short term negative consequences. We do not think the US election should be an impediment for investors in risky asset such as value stocks, commodities or emerging markets.
So is there anything that can prevent new all time highes in the near-future? The answer: only central banks.
We believe the major risk for investors continues to be potential tightening from central banks, high valuations in certain segments of equity markets, and the ‘ageing’ US business cycle.
And since Yellen yesterday responded that she is not worried about creating asset bubbles, it appears that – at least when it comes to market technicals – one major brick from the wall of worry has been removed.
