Wall Street’s top strategist Marko Kolanovic said the sell-off in the stock market — spurred by expectations for tighter monetary policy — is overdone, and investors should buy the dip.
“Higher bond yields should not be disruptive for equities, but rather support our call for a Growth to Value rotation,” JPMorgan’s Kolanovic said in a Monday note titled “Buy the dip — markets can handle higher yields.”
“We stay positive on equities and expect Omicron will ultimately prove a positive for risk assets,” he added. “Near term we recommend buying the dip on US indices given oversold conditions.”
Tech shares contributed to another negative day on Wall Street Monday as investors continued to dump growth names in the face of higher bond yields. The tech-heavy Nasdaq Composite has lost 6.7% in the new year, while the S&P 500 has fallen 3.5%.
The Federal Reserve has signaled it could become even more aggressive than expected about tightening policy to tame down surging inflation. Investors now expect the central bank to start raising interest rates as soon as March.
The 10-year Treasury yield topped 1.8% on Monday. The benchmark rate ended the prior year at around 1.51%.
“The pullback in risk assets in reaction to the Fed minutes is arguably overdone; policy tightening is likely to be gradual and at a pace that risk assets should be able to handle, and is occurring in an environment of strong cyclical recovery,” Kolanovic said.
JPMorgan’s Kolanovic was one of the few on Wall Street who correctly called the March 2020 bottom and the subsequent rebound. He was promoted to chief global markets strategist from the bank’s head of macro quantitative and derivatives strategy in 2021.
Kolanovic has a Ph.D. in theoretical physics, and he’s famous for using alternative and quantitative data to predict the stock market’s ups and downs.
The strategist believes that the omicron variant is milder but more transmissible, and it could speed the transition from pandemic to endemic with a lower human toll.
“As this wave fades, it will likely mark the end of the pandemic, as Omicron’s lower severity and high transmissibility crowds out more severe variants and leads to broad natural immunity,” Kolanovic said.