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Stock selloff ‘overdone,’ Fed at ‘peak hawkishness,’ JPM analyst says

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Panicked selling on Wall Street in response to the Federal Reserve’s rate hikes to combat inflation is likely an overreaction – and is an opportunity to snap up riskier assets such as corporate bonds, according to a prominent market analyst.

JPMorgan Chase’s Marko Kolanovic made the case in a Monday note to clients – arguing that he disagreed with the mounting number of analysts and institutions who have argued the US economy is headed toward a recession.

After losing more than 600 points on Monday, the Dow Jones Industrial Average on Tuesday was recently up 436 points at 32,682 in early morning trades.

Kolanovic added that the Federal Reserve and other central banks have likely reached “peak hawkishness” on interest rate hikes.

“The past week’s selloff appears overdone, and driven to a large extent by technical flows, fear, and poor market liquidity, rather than fundamental developments,” Kolanovic said.

The Dow closed 600 points lower on Monday.
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“While we expect growth to soften, we continue to push back on a base case assumption that the global economy is headed for recession, an outcome that is increasingly being priced by markets,” he added.

Kolanovic cited several factors in defending his stance that recession fears were unwarranted, including ongoing COVID-19 reopening efforts, easing restrictions in China and a tight US labor market.

Bloomberg was first to report on Kolanovic’s note.

The “pro-risk’ analyst advised clients to buy more corporate bonds – though Bloomberg’s US Corporate Bond Index was down 13% through the first four months of the year.

JPMorgan Chase analyst Marko Kolanovic argued central banks have likely reached “peak hawkishness.”
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“The most attractive way of fading the recent surge in risk aversion/volatility is by increasing allocations to credit, where spreads and yields look high,” Kolanovic added. “As a result, we increase the corporate bond allocation in our long only portfolio by 4% and fund this increase by equal reductions in allocations to cash and government bonds.”

Fed Chair Jerome Powell initially triggered a “relief rally” last week after he indicated the central bank was not considering interest rate hikes higher than a half-percentage point to combat inflation, which hit a four-decade high of 8.5% in March.

But that relief turned to panic as investors digested the reality that the Fed would need to enact a steady stream of rate hikes to cool the US economy – with many skeptical that the bank was capable of engineering a “soft landing’ that would tame inflation would causing a recession.

Stocks had continued their decline on Monday, with the Dow Jones Industrial Average closing more than 600 points lower, the tech-heavy Nasdaq shedding 4% and the broad-based S&P 500 losing 3%. The S&P 500 has declined for five consecutive weeks.