The divergence between the S&P 500 stock index and real 10-year rates was approaching the steepest level in nearly two decades, with the exception of 2020.
On October 5, 2023, Marko Kolanovic, chief global market strategist and co-head of global research at JP Morgan, appeared on CNBC’s “Fast Money” to discuss a variety of topics, including his views on the stock market, stance of the Federal Reserve. on interest rates and performance of mega-cap stocks compared to mid-cap stocks.
With a Ph.D. Kolanovic, a doctor in theoretical high-energy physics from New York University, brings a quantitative perspective to market analysis. His team has earned top rankings in global institutional investor surveys and he personally ranks No. 1 in equity derivatives in America.
Prior to JP Morgan, he held key positions at Bear Stearns and Merrill Lynch. Known for his accurate short-term market forecasts, CNBC has labeled him “The Man Who Moves the Markets” and Bloomberg has called him “Gandalf.” In 2020 he was inducted into the Institutional Investors Hall of Fame.
Market Outlook
Kolanovic began by stating that he has a somewhat negative outlook on the stock market. While he didn’t explicitly say a recession is inevitable, he did mention that he believes it will “eventually happen.” He also noted that the stock’s upside to downside ratio isn’t particularly favorable right now.
Economic Indicators
Kolanovic noted that the labor market is strong but highlighted signs of stress in the consumer sector, such as rising delinquencies on credit cards and auto loans. He suggested these could be early indicators of economic challenges, although he did not specifically say consumer confidence is eroding.
Interest Rates
Kolanovic spoke about the current level of interest rates, in particular the 4.7% yield on ten-year Treasury bonds. He stated that these rates do not align with historical market multiples and mentioned that they could rise a little more. However, he did not express explicit concern about current rate levels.
Market Dynamics
Kolanovic spoke about the divergence between the Nasdaq and other markets. He noted that while the NASDAQ and mega-cap stocks have performed well, other markets have been flat or down. He offered two courses of action: invest in lagging stocks if a recession is not believed to occur or avoid mega-cap stocks if a recession is expected.
Positioning and Feeling
Kolanovic highlighted that market positioning is important and has been an important factor this year. He noted that volatility has been decreasing, which has been a tailwind for the market. However, he did not specifically say that the rising volatility is a sign that tougher times are ahead.
Volatility as an Asset Class
Kolanovic briefly addressed the topic of volatility as an asset class. He mentioned that it is a challenge to have the right volatility because it is usually negative. He suggested investors could use it to generate returns by selling short-term options.
Goldman Also Warns of Risk for Stocks Due to Higher Interest Rates
The Goldman Sachs Group Inc team joined its peers at Morgan Stanley and JPMorgan Chase & Co. in warning that high rates could lead to further declines in stocks.
Such decoupling implies a reduction in the return from holding riskier stocks compared to a safe-haven asset, such as US government bonds. This “may further limit stocks’ ability to digest further rate increases,” the strategists, including Andrea Ferrario and Christian Mueller-Glissmann, wrote in a note dated Oct. 2.
By Audy Castaneda
