JPM’s head quant, Marko Kolanovic, who turned somehwat gloomy in the past few months, has seen some hits and misses in his recent forecasts. On one hand he did accurately predict the surge in gold one month ago, as well as the rebound in oil and Emerging Markets; however on the other he suggested that being long VIX and cash would be a good place to wait out the upcoming market volatility.
Most recently, when looking at the market’s fundamentals which as we pointed out in late February are massively stretched, he also noted that “EPS recoveries that follow 2 consecutive EPS contractions (~20% of times) were typically triggered by some form of stimulus (fiscal, monetary or exogenous). We expect market volatility to stay elevated and investors to remain focused on macro developments such as the Fed’s rates path, developments in China, and releases of US Macro data. Elevated volatility and EPS downside revisions will provide a headwind for the S&P 500 to move significantly higher (via multiple expansion).”
Perhaps Kolanovic failed to anticipate the “animal spirits” response to first a stimulative PBOC, then a dovish BOJ, followed by an even more dovish ECB and topping it off, yesterday’s dovish FOMC, which was clearly sufficient to boost both the Dow Jones and the S&P500 into the green for the year. He is correct, however, that in the absence of a major stimulus, EPS will likely remain subdued: after all the only “stimulus” from the ECB was a greenlighting for European companies to buyback their stock with ECB-backstopped debt issuance, while the Fed merely slowed down the pace of its rate hikes, confirming that the global economy is quite weaker than it had originally expected.
This is how Kolanovic explains this new period of central bank convergence:
This post was published at Zero Hedge on 03/17/2016.
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