Even JPMorgan bullish strategist Kolanovic says the markets are getting ahead of themselves.  Here's what he and a Goldman strategist say do now.

Even JPMorgan bullish strategist Kolanovic says the markets are getting ahead of themselves. Here’s what he and a Goldman strategist say do now.

A not-so-awful day is looming as the clock ticks down to Wednesday’s retail sales report.

But while some investors cling to hope that last week’s stock run could continue, fueled by this weaker inflation report, Wall Street remains wary and fresh warnings from two big banks that make up our call of the day.

Late Monday, Goldman Sachs warned clients that the rally in bonds and risky assets was “probably overdone.” Almost simultaneously, one of Wall Street’s most vocal bulls – JPMorgan’s Marco Kolanovic – cut his exposure to equity risk for the second time in two months, and he also cited that big market rebound last week.

The first is Kolanovic, who has been a standout bull for much of this year.

With the “federal funds rate near 5%, a recession will be hard to avoid unless the Fed pivots more significantly. As such, our optimism is tempered by still-elevated recession risks and the risk that October CPI data turns out to be anomalous and/or fails to dampen central bankers’ eagerness to push the politics in more restrictive territory,” Kolanovic said.

Taking advantage of last week’s rally, JPMorgan plans to “moderately” reduce its equity overweight. Other moves? Break out of a long dollar bias, adding exposure to corporate bonds with a focus on high yields; reversing a previous overweight in US investment grade credit relative to European credit, due to the latter’s higher risk premium; and a shift to neutral from an underweight in emerging market sovereign debt.

Kolanovic says they also remain overweight commodities, committed to easing COVID restrictions in China and hedging against both inflation and geopolitical risk.

The strategist called the summer rally in equities and as early as September said equities could count on “strong earnings, weak investor positioning and well-anchored long-term inflation expectations,” even though the Fed was warmonger. He first reduced equity exposure in October, worrying about the tough tone and geopolitics of the Fed.

As for Goldman Sachs, which has been much more wary this fall, a team led by strategist Cecilia Mariotti noted that last week’s stock run focused on “some of the shortest and longest pockets of the market”. That is, the basket of unprofitable technologies from Nasdaq and Goldman, which were also among the worst performers of the year so far, she said.

In line with a negative correlation seen with bond yields this year, the recent rise in equities “likely reflects market hopes for a real spike in inflation and hawkishness, which would tend to support risky assets provided the growth remains good,” she said.

And while strong bear market rallies aren’t unusual, the bank believes “bearish positioning has exacerbated some of the moves.” In fact, a temporary respite in certain sentiment indicators, such as polls breaking out of bearish levels, can lead to major reversals in stocks, she said.

That’s when consumers themselves become wary, Mariotti said, citing the University of Michigan’s recent consumer sentiment survey.

The strategist said investors need to understand that the risks of a “prolonged hiking cycle” remain and that if markets see a significant easing in financial conditions, that can only force central banks to reiterate a hawkish stance, especially in the case of resilient growth.

Goldman’s advice? Avoid tech stocks that continue to look expensive and check out China, which is supported by reopening hopes.

Lily: The Dow is outperforming, which could be a sign that the latest stock market rally is about to die down

The steps


ES00 Equity Futures


are higher than the DXY of the dollar
post-CPI decline continues, with Treasury yields BX:TMUBMUSD10Y

also softer. The cooling of Sino-American tensions is also helping to boost morale. CL Oil Price
are a little lower. The International Energy Agency has predicted higher demand for this year and next. Elsewhere, or GC00
is up and bitcoin BTCUSD
firmer at $16,802.

The buzz

Home Depot HD
Shares are down after the DIY retailer reported better-than-expected earnings and left its outlook unchanged. WMT Walmart
results are yet to come.

China’s economic activity showed signs of slowing in October, but stronger online sales boosted Alibaba BABA
and other technology names in Hong Kong, with related ADR registrations increasing in pre-market commerce.

The Empire State’s producer prices and manufacturing index are due at 8:30 a.m., while the Fed. Govt. Lisa Cook and Philadelphia Fed Pres. Patrick Harker will make morning appearances, along with Fed Vice Chairman Michael Barr testifying before the Senate Banking Regulatory Committee. Third-quarter household debt and mortgage debt are due at 11 a.m.

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Expectations of a recession are the highest since April 2020, at the height of the COVID pandemic. That’s according to Bank of America’s Global Fund Manager survey, released on Tuesday, which shows that 77% of managers see this economic setback happening next year.


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