- JPMorgan has identified six reasons that stocks and risk-on securities are in a bullish environment since the S&P 500 posted a low on March 23.
- In an analyst note published Tuesday afternoon, the bank said liquidity injections, low bond yields, investors being underweight equities, the defensive nature of the current market rally, the quick healing of credit markets, and the relaxation of lockdowns were all reasons to be bullish on stocks.
- JPMorgan has taken a bullish stance on stocks since mid-March.
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JPMorgan is bullish on stocks right now, and it listed six reasons in a note published Tuesday afternoon.
The bank has been bullish on stocks since mid-March and thinks the latest bullish environment can continue.
Since its March 23 low, the S&P 500 index has rallied nearly 30%.
From low bond yields to the relaxation of lockdown restrictions, here are JPMorgan’s six reasons for being bullish on equities.
2. “Zero cash rates and low bond yields”
In other words: TINA, aka, There Is No Alternative.
JPMorgan said that with cash yielding close to zero for the foreseeable future, “there would be no other place for these cash balances to go than chasing equities and bonds in the world as the need for precautionary savings subsides over time.”
JPMorgan argued that even when accounting for dividend and buyback declines caused by the coronavirus pandemic, equities offered superior yields over bonds and cash.
“To be conservative for equities we incorporate sustained divided cuts as implied by 2022 dividend futures and a sustained 25% decline in buybacks,” the bank said. “Even after these conservative adjustments, we find that global equities offer higher than 5% yield, which compares to 1% for global bonds and close to 0% for cash.”
3. “The presence of an equity short base and equity underweights among investors”
When looking at fund flows, JPMorgan said short covering was responsible for driving much of the recent market rally, and there’s still more room left for this rally to continue.
According to the bank, there are three main fund-flow forces: short covering, rebalancing portfolios, and volatility normalization.
Short covering occurs when bearish investors who short the market close their position by buying it back.
Rebalancing portfolios occurs when investors who are overweight bonds in their portfolio because of market moves will sell bonds and buy equities to get their portfolio back to its target allocation.
Volatility normalization includes risk-parity funds that raise their equity exposure as market volatility calms down.
“In our mind the short covering force is likely done by around 50%, the rebalancing force is likely done by around 85%, and the volatility normalization force is likely done by around 70%,” JPMorgan said.
4. “The defensive nature of the risky market rally so far”
JPMorgan said the global rally in equities since the March 23 bottom had been defensive in nature, with little participation by value stocks.
“Markets are still pricing in weak economic recovery as evidenced by still depressed dividend futures prices in equities and high credit spreads in HG and HY (which are still close to recession levels),” JPMorgan said.
The bank added that the equity market’s rally over the past few weeks had been driven more by discount rate compression than by high growth expectations.
With such a wall of worry still in place, equities have more room to run as economic concerns slowly subside as a recovery takes shape, JPMorgan said.
5. “The relaxation of lockdowns and signs of bottoming out in economic expectations”
JPMorgan said economic normalization had begun as regions across the globe began relaxing lockdowns that had shut down economies to help limit the spread of the coronavirus.
Additionally, the bank said “the recent collapse in economists’ expectations about GDP appears to be behind us as shown by the nascent recovery in our Global Forecast Revision Index.”
The Global Forecast Revision Index measures the cumulative weekly changes in GDP forecasts for the current quarter.
6. “The rapid healing of credit markets”
JPMorgan has observed a “rapid healing” in credit markets via a recovery in credit spreads and via a normalization in issuance. This has occurred much faster than after the Lehman Brothers collapse, which practically shut down credit markets overnight in 2008.
“In turn, the rapid normalization in corporate bond issuance should help reduce the severity of the current default cycle … thus making the current economic contraction rather short lived,” the bank said.