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- Investor complacency is nearing its highest point in 20 years as bullishness overpowers correction fears, JPMorgan said.
- US stocks currently trade around record highs as hopes for new stimulus and economic reopening fuel a rotation to cyclical assets.
- Downside risks remain, but investors should stay in the market as the steady climb continues, the bank said.
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Investors are the most comfortable they’ve been across markets since the dot-com era as expected stimulus and falling COVID-19 case counts boost recovery optimism, JPMorgan strategists said.
The bank’s composite gauge of investor complacency is brushing up against its highest level in 20 years according to positioning, ETF flows, and valuation data, among other variables. The reading comes as US stocks trade near record levels.
Several market events in 2021 back up JPMorgan’s gauge. The Reddit-trader phenomenon late last month saw risk-loving retail investors pile into highly shorted stocks including GameStop, AMC, and Bed Bath & Beyond. The trend has since lifted everything from cannabis producers to obscure cryptocurrencies as bullishness eclipses concerns of a near-term correction.
That’s not to say downside risks are absent. Federal Reserve tapering later in the year, geopolitical tensions, stimulus-fueled inflation, and vaccine distribution failures can all hinder market rallies, JPMorgan said. The coronavirus crisis should also remind investors that major disruptions can come with little to no early signs.
Still, the complacency metric's elevated reading isn't reason enough to sell, according to the bank. The signal has little weight in JPMorgan's overall strategy and should mainly be regarded as an indicator of where to steer cash, the firm added.
"For now, the message of the model is more a reason to avoid extreme risk exposures rather than turn overall neutral or defensive," the team led by John Normand said.
The strategists recommend taking a moderately overweight position in stocks over bonds and holding overweight positions in oil, agriculture, and value stocks. Vulnerability should skew more toward a growth shock due to a clear overweight in cyclical assets, they added.