What Can Stop This Relentless Selling? Some Thoughts From JPMorgan
It’s official: the inevitable Biden Bear Market is finally here, and the 20% drop from the January all time high coincides with another dismal record: the Dow Jones will post negative returns for a whopping 8 consecutive weeks, the longest such stretch since 1923! And, judging by the implosion in sentiment, next Friday Biden will be the proud owner of the first ever 9 week stretch.
Bear market aside, it is remarkable just how fast we crashed: the S&P was at 4546 on April 1 and has plunged to 3901 yesterday, a -14.2% drop in a month and a half. Over that time, Energy has been the only positive SPX sector, adding 5% with Tech the biggest drag with AAPL, AMZN, GOOG, NFLX, and TSLA all losing at least 21%.
And as desperate investors scratch their heads and wonder just what can end this amazing market implosion – before the November midterm votes of course – and what could break this trend, JPMorgan’s researchers are conveniently coming up with Deus Ex machinas that they believe could provide some near-term market solace. Chief among them is month-end rebalancing, which according to a note from JPM strategist Nick Panigirtzoglou could lead to at least a short-term bounce.
We excerpt the notable highlights from the note (which is available to pro subscribers in the usual place):
JPM expects the potential equity buying by the end of May due to monthly rebalancing by balanced mutual funds to be between $34bn and $56bn.
By quarter-end the potential equity buying due to rebalancing grows by an additional $40bn due to Norges Bank/GPIF/SNB and an additional amount by US defined benefit pension funds with an upper bound of $167bn.
Narrow liquidity will keep contracting due to QT but it will likely take some time before the QE stock effect is unwound.
The propensity of broad liquidity to propagate financial assets currently stands at its highest level since June 2020.
Market depth at March 2020 lows for both equities and bonds.
JPM quant aside, the commentary from flow trader Andrew Tyler is somewhat more balanced: he summarizes his views this morning as follows:
the US economy is better than many people think – there should be natural deceleration from the strongest GDP/earnings year in a generation but still above trend;
there is a divergence between the underlying economy and financial markets – Marko’s recent note looked at implied recession probabilities by asset class;
it will take time for the economy and markets to converge – Fed wants to see more data and thus have flagged its behavior into the Sep 21 meeting and investors will want to see the macro data stabilize in an expansionary level without creating additional inflation pressures;
a market neutral approach is preferred – we remain in a range but that range continues to move, lower throughout the year;
commodities and commodity-related Equities are the best longs for virtually any investment horizon; and
Tech will continue to move the market, higher or lower, and thus remains challenged but potentially tradeable for shorter-term investors.
Finally, turning to economic fundamentals which once upon a time used to matter and maybe will again, JPM writes that as the market looks for signs of either economic improvement or further deterioration, the Consumer is becoming the focus with a stronger Retail Sales number but a series of earnings-related blows up. “This will be a key consideration moving forward” according to Tyler, even though our own view is widely known:
And then we told them the consumer is strong… pic.twitter.com/wvuwVrYMiY
— zerohedge (@zerohedge) May 18, 2022
Also keep an eye on the housing market. Lumber prices more than tripled in the 15 months after COVID lockdowns began the US.
Since that May 2021 peak, lumber prices have fallen ~60% from their peak. Some investors will look to lumber as a leading indicator for home price direction. Home prices have been a major part of core inflation.
Fri, 05/20/2022 – 13:20