The JPMorgan Chase & Co. JPM, +0.79% strategist nicknamed “Gandalf” for his timely market calls says equity investors should tread carefully, because even a mild recession could cause U.S. stocks to fall by 15% or more.
Investing in still-richly valued stocks makes little sense when short-dated Treasury instruments like the 3-month TMUBMUSD03M, 5.154% and 6-month bills TMUBMUSD06M, 5.064% are yielding more than 5%, according to Marko Kolanovic, JPM’s chief global markets strategist.
As of Monday’s close, the S&P 500 SPX, +0.33% was sporting a forward price-to-earnings ratio of 18.3, which is still above the 10-year average of 17.3, according to FactSet.
“On the downside, even a mild recession would warrant retesting the previous lows and result in 15%+ downside,” Kolanovic said.
See: The stock market simply ignored a recession once before. Can it do it again?
Investors would be better served by keeping most of their money in short-dated bonds because they can always buy the dip in equities following a selloff.
“Short-term fixed income provides not only full protection on the downside but also optionality to buy risky asset classes should this pullback happen,” Kolanovic said.
Much of the rally in U.S. stocks since the beginning of 2023 has been driven by “irrational” factors like short-covering and systematic inflows. Now, Kolanovic is recommending JPM clients to keep their equity allocation at underweight levels, while going overweight on cash. If investors must own stocks, they should focus on defensive stocks and high-quality businesses. He also recommended clients stay overweight Japanese stocks, which have attracted attention lately thanks to Warren Buffett upping Berkshire Hathaway’s stake in five trading houses.
Kolanovic stood by his bullish view on stocks during the first half of 2022 as the market plunged to ever-lower levels. He called a rebound off the June lows. More recently, he has adopted a more downbeat stance, warning of a punishing implosion in stocks potentially driven by banks’ continuing to tighten lending conditions.