- The stock market's 10% plunge into correction territory doesn't validate the idea that the bull market cycle is over, according to JPMorgan.
- The bank said while investors should buy commodities to hedge their portfolio from geopolitical tensions, a rally in risk assets remains likely.
- "The start of policy tightening is usually a confirmation that the cycle has legs, rather than the signal of its end," JPMorgan said.
The S&P 500 entered correction territory on Tuesday after it fell more than 10% from its record high, but that doesn't mean the bull market in stocks is over, according to JPMorgan's Marko Kolanovic.
Rising geopolitical tensions between Russia and Ukraine, combined with a Federal Reserve that is expected to begin raising interest rates next month, has led to a risk-off period for the stock market so far this year.
But Kolanovic sees potential for risk assets to rally if geopolitical tensions fade, and said the Fed raising interest rates rarely marks the end of an economic expansion and bull market for stocks.
"We note that historically the initial volatility around rate liftoff didn't last and equities made new all-time highs 2-4 quarters out. The start of policy tightening is usually a confirmation that the cycle has legs, rather than the signal of its end," he explained.
That's especially true if the yield curve, or the difference between short-term and long-term interest rates, doesn't invert. "As we don't see the yield curve inverting or real yields reaching problematic levels this year, it is premature to talk about end-of-cycle worries," Kolanovic said.
Despite the optimism, there is still reason to be cautious. Namely, he recommended investors hedge against the potential for increased risks between Russia and Ukraine by buying commodities and energy/material stocks. Combined with the potential for increased geopolitical tensions, Kolanovic also observed that the Fed has a narrow path towards reaching optimal monetary policy.
With shaky fundamentals and a bearish head-and-shoulders technical pattern in play, some investors are expecting the S&P 500 to drop below the 4000 level.
But JPMorgan said "the absence of an inverted 2s/10s [yield] curve points more to mid-cycle consolidation, similar to the patterns that developed surrounding the 1983, 1994, 2004, and 2015 initial removal of accommodative monetary policy during the respective economic cycles."
With that, investors should remain invested and prepare for a risk-on rally later this year. "We remain overweight equities and underweight bonds as we don't see the current geopolitical risk as threatening the 2022 growth outlook," Kolanovic said.