(Bloomberg) - A debt-ceiling negotiation that remains in limbo, elevated recession risks and a hawkish Federal Reserve stance are just a few of the reasons JPMorgan Chase & Co.’s Marko Kolanovic is advising clients to further dump equities and hold onto cash.
A team of JPMorgan strategists led by Kolanovic trimmed its allocation to stocks and corporate bonds while boosting its stake in cash by 2%. Within the commodities portfolio, the firm also rotated out of energy and into gold on haven demand and as a debt-ceiling hedge — another move intended to strengthen the JPMorgan’s defensive posture.
“Hopes of a swift resolution to the US debt ceiling have somewhat bolstered market sentiment,” Kolanovic wrote in a note to clients. “Despite last week’s rebound, risk assets are failing to break out of this year’s ranges and if anything credit and commodities are trading at the lower end of this year’s ranges. With equities trading close to this year’s highs, our model portfolio produced another loss last month, the third loss in four months.”
US stocks treaded water Tuesday as investors awaited answers from Washington on what the federal government will do to avert a catastrophic default. President Joe Biden and Republican House Speaker Kevin McCarthy held what both politicians called a “productive discussion” Monday evening but did not settle on a deal.
Kolanovic was one of Wall Street’s biggest bulls across much of the market rout in 2022, but has since U-turned on a deteriorating economic outlook this year, cutting the bank’s model equity allocation in mid-December, January, March — and now May.
More broadly, Kolanovic and his team said equities appear disconnected from bond markets and softening economic data, in addition to debt-ceiling risks.
“A divergence remains between rates markets that expect the Fed to cut this year, equity markets that interpret those potential cuts as positive for risk, and the Fed’s more hawkish rhetoric,” he said. “This gap is likely to close at the expense of equities, as rate cuts will likely only transpire from a risk off event, and if rates stay higher they should weigh on equity multiples and economic activity.”