J.P. Morgan Said Yesterday; "Buy The Dip"
Investors should buy the dip in the stock market as the selloff sparked by last week’s “hawkish surprise” in the Federal Reserve’s meeting minutes is arguably overdone, according to analysts at JPMorgan Chase & Co.
Monetary policy tightening will probably move at a gradual pace, the analysts, led by Marko Kolanovic, wrote in a J.P. Morgan research note Monday. “Markets can handle higher yields.”
Minutes from the Fed’s December meeting released last week rattled markets as they showed the central bank considering raising interest rates sooner and faster against the backdrop of surging inflation. The yield on the 10-year Treasury note, 1.757% was trading around 1.78% on Monday afternoon, up from around 1.5% at the end of December.
“Higher bond yields should not be disruptive for equities, but rather support our call for a growth to value rotation,” the J.P. Morgan strategists said in their note.
Value stocks have been outperforming growth equities in recent weeks amid concern that rising interest rates will hurt market valuations of high-growth companies in the technology sector.
The tech-heavy Nasdaq Composite Index COMP, +0.05% was trading lower Monday afternoon, but had recovered from steeper losses in earlier trade, when it appeared on the verge of closing out below its long-term 200-day moving average for the first time in about 20 months.
Investors also have worried that the rapidly spreading omicron variant of the coronavirus could hurt economic growth as it has led to a surge in COVID-19 cases.
But markets can also handle omicron, according to the J.P. Morgan report.
“We stay positive on equities and expect omicron will ultimately prove a positive for risk assets, as this milder but more transmissible variant speeds the transition from pandemic to endemic with a lower human toll,” the J.P. Morgan analysts wrote.
“As this wave fades, it will likely mark the end of the pandemic,” they predicted, while also saying, “as omicron’s lower severity and high transmissibility crowds out more severe variants and leads to broad natural immunity.”
For the near term, the J.P. Morgan research analysts said “we recommend buying the dip on US indices given oversold conditions.”
The S&P 500 SPX and Dow Jones Industrial Average DJIA were also trading down Monday afternoon, as the U.S. stock market extended last week’s declines.
Over the medium term, the J.P. Morgan strategists favor emerging markets, China and Europe “on improving activity and easing headwinds, and the UK on valuation,” according to the J.P. Morgan report. The Eurozone’s 2022 real GDP forecast of 4.6% stands above the U.S. for the first time since 2016, the analysts wrote.
The strategists also cited “signs of supply constraints potentially passing their worst point” and took an optimistic view of corporate earnings. Consensus projections will probably prove too low, they said, pointing to “further upside for stocks.”
“We stay bullish,” the analysts wrote. “Positive catalysts are not exhausted.”