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Market bull Marko Kolanovic from JPMorgan helped set the stage for today’s stock market rally after publishing a bullish 2nd-half global markets outlook, which predicts no recession and lower inflation. In addition, he followed it up with a report that suggested an end-of-month and quarter rebalancing could push the stock market up 7% next week.
On the global outlook, Kolanovic highlights that their economics department does not see a recession materializing this year. A recession is not their base case over the next 12 months, in fact, they see global growth accelerating from 1.3% in the first half of this year to 3.1% in the second half. On inflation, they see it declining from a 9.4% annualized rate in the first half to 4.2% in the second half. This will allow central banks to pivot and avoid producing an economic downturn. Further, they see China accelerating to 7.5% in the second half, up from basically zero (0.5%) in the first half of the year. Given their view of no recession, risky asset prices are “too cheap,” he said.
In this morning’s note on end-of-month and quarter rebalancing, Kolanovic said while rebalances are usually not the main driver of the market, next week’s rebalancing will be different. This is due to the fact that equity markets were down significantly over the past month, quarter, and six-month time periods and it is happening in a period of low liquidity. In addition, the market is in an “oversold condition, cash balances are at record level, and recent market shorting activity reached levels not seen since 2008.”
“This year the impact of rebalances have been significant due to large market moves and low liquidity. For instance, near the end of the first quarter, the market was down ~10%, and experienced a significant ~7% rally in the last week going into quarter-end,” Kolanovic explains. “On the most recent monthly rebalance, near the end of May, the market was down 10%, and experienced a significant rally of ~7% going into month end. Let’s look at the current rebalance setup. Broad equities are down 21% for the year (9% vs bonds), 16% for the quarter (11% vs bonds), and 9% for the month (7% vs bonds). Rebalances across all 3 lookback windows would reinforce and, based on historical regression, would imply a ~7% move up in equities next week.”
