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Stocks may not have more room to run going by the way investors are placing their bets, according to JPMorgan Chase & Co. The view is shared by Jefferies, which recommends investors pause for a breather.
Global equities could climb as much as 8 per cent if bond valuations remain where they are and investors become the most overweight since September, JPMorgan strategists led by Nikolaos Panigirtzoglou wrote in a note July 12. That’s likely true even if the Federal Reserve cuts rates by more than what markets have factored in, as occurred in 1995 and 1998, they said.
Our position-based analysis points to limited upside for equities from here even if the 1995/1998 insurance-rate-cuts scenario plays out over the coming months, the strategists wrote. And any equity upside would become even more limited if bond markets fail to sustain their H1 gains.
Comparing global M2, or the cash balance of non-bank investors, with equity and bond holdings held by them, reveals a 20.8 per cent bond allocation that’s above the post-Lehman Brothers historical mean, the strategists wrote. The exposure to stocks at 43.6 per cent is higher than the post-Lehman collapse average of 40 per cent.
Investors globally are rather overweight on equities especially compared with the post-Lehman period, the strategists wrote.
Jefferies notes that recent flows into equity funds have been almost absent and earnings revisions haven’t bottomed out. Those factors may cause this years rally to pause, global equity strategist Sean Darby wrote in a note dated July 15.
Equity investors have enjoyed strong gains so far in 2019, with the S&P 500 up 20 per cent and the MSCI All-Country World Index gaining 16 per cent, as the Fed pivoted to dovishness, and recently signalled likely rate cuts. Also, investors worst fears about trade tensions haven’t yet been realised and the American economy is still showing some strength. The US 10-year Treasury yield is down more than 50 basis points to 2.12 per cent this year.
While a 25-basis point reduction by the Fed has been priced in, the move will accomplish nothing aside from temporarily sating market expectations and quieting the White House Twitter account, Darby said. The weaker parts of the US economy fixed investment and manufacturing are being affected by trade tensions.
Jefferies said a self-reinforcing feedback loop has emerged, where markets are leading central bankers rather than the other way round.
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