Its Over, page-17055

Sell into rallies, JPMorgan advises clients
Timothy MooreBefore the Bell editor
Mar 21, 2023 – 8.46am


The banking sector’s crisis should be a warning of the “upcoming consequences” of aggressive tightening by the Federal Reserve, according to JPMorgan equity strategists led by Marko Kolanovic.

“We stick to our call that [the first quarter] will likely end up the high point for [US] stocks this year, and see the strong rally since October, that was driven by our views of CPI peaking, China reopening and fall in European gas prices, not getting a fundamental confirmation in [the second half],” the strategists said in a note.
“We believe that what was a still resilient market backdrop earlier in the year, given light positioning, activity pickup, and supportive seasonals, is expiring.

“While parts of the market look short term oversold, and there could be potential relief bounces, we advise to use these to sell into. It is unlikely that we will have a fundamental low reached until the Fed is well advanced with rate cuts.”
Kolanovic said the failure of Silicon Valley Bank reflects rising financial stress as does the surge in borrowing by lenders from the Fed.


“While our view is that some of these moves are getting extreme, and that it is unlikely that the current stress becomes systemic, the damage is done, and the financing conditions are set to tighten meaningfully further.”

The “damage” compounds already significant tightening seen so far, just the same as typically seen in the run-up to a recession, he said. The Fed has lifted its key rate near 5 per cent in the last year.

“The falloff in the momentum of actual lending to the real economy is not dissimilar to what was the case in 2007.” As a result, investors should prepare for “a recessionary type of market trading” in the second half of the year, Kolanovic said.

“Big picture, we think that equity market is unlikely to see a fundamental bottom until the Fed pivots, and a number of rate cuts are delivered. Crucially, equities typically do not tend to bottom before the Fed has stopped hiking. In fact, the low would not happen before the Fed was well advanced with cutting.”

After an overweight value stance in 2021 and 2022, JPMorgan does not see value working this year, he said, which is why three weeks ago, it flagged that the next trade is to go outright short value.

“The yield curve continues to be deeply inverted at present and we are worried that it may end up proving its effectiveness as a recession signal yet again,” Kolanovic said, adding that “even if one sees curve re-steepening from here, that was typically not a helpful sign. Curve tends to steepen just ahead of a recession”.

He also said that “even if we get a dovish surprise and the Fed ends up not hiking this week, potentially resulting in a steeper yield curve, this may not end up a positive”.

Fed policymakers are poised to begin a two-day meeting on Tuesday with a decision as well as updated economic projections on Wednesday (Thursday AEDT). JPMorgan expects a 0.25 percentage point rise this week and another in May.