- Markets have been ignoring weak economic data recently, according to JPMorgan's Marko Kolanovic.
- In a Wednesday note, the widely followed quant guru noted that investors are lightly positioned in stocks.
- Kolanovic also pointed out that markets have already priced in the cyclical weakness.
Markets have been ignoring weak economic data recently and even rallied over the past week, according to JPMorgan's Marko Kolanovic.
In addition, volatility in stocks and rates is easing in a sign of low sensitivity to mounting recession concerns, he said in a note Wednesday.
The US economy has recently flashed negative growth indicators, including the slowdown in housing data and the ongoing rise in weekly jobless claims, Kolanovic wrote.
But risk markets have shrugged off weak economic data. One reason for this is that investors are lightly exposed toward stocks, in JPMorgan's view. Overall, the lower equity positioning prevents the market from being overly reactive to downbeat data.
Second, market prices already reflect much of the cyclical weakness, according to Kolanovic. This is made evident in recent earnings revisions.
"[S]o far this year these downward earnings revisions have advanced to a very large extent, tracking the pattern seen in previous recessions, thus already incorporating significant earnings declines going forward," Kolanovic wrote. Mild earnings declines, he added, have been anticipated.
At the same time, JPMorgan said market-based measures of inflation expectations have declined in recent weeks, and in the event of a recession, a dovish Fed pivot should be easier to stomach.
"In response to economic weakness and declining inflation expectations, rate markets are already sensing a Fed policy reversal by pricing in an earlier (January 2023 vs. August 2023 in mid-June) and lower Fed funds rate peak (3.3% currently vs. a 4% peak in mid-June)," Kolanovic wrote.
Ultimately, the quant guru predicts that the worst of the market risk and volatility has come and gone: "We thus remain cautiously optimistic and continue to combine a sizeable equity overweight in our model portfolio with a credit underweight as a hedge."