The latest sell-off in stocks doesn't mark the beginning of a bear market cycle as the US is poised to avoid a recession, JPMorgan's quant guru says

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  • The sell-off in the stock market should be short lived as the US economy avoids a recession, according to JPMorgan’s Marko Kolanovic.
  • Strength in the consumer, policy stimulus in China, and an ongoing recovery from COVID should power the economy forward, Kolanovic said.
  • “Our positive view is driven by the fact that the year-to-date move in markets prices in more than enough recession risk,” Kolanovic said.

The ongoing stock market decline is overdone as the S&P 500 officially enters bear market territory, JPMorgan’s Marko Kolanovic said in a Monday note.

Kolanovic believes enough recession risk is priced into the market already, and that the US economy will ultimately avoid a recession despite concerns of high inflation and rising interest rates.

“Our positive view is driven by the fact that the year-to-date move in markets prices in more than enough recession risk, while we believe a near-term recession will ultimately be avoided,” Kolanoic said. Driving Kolanovic’s confidence includes a strong consumer, the ongoing recovery from COVID-19, and policy stimulus from China.

But investors weren’t listening to Kolanovic on Monday, as the S&P 500 dived more than 4% to close in bear market territory and the Dow Jones fell nearly 1,000 points. The broad risk-off sentiment was sparked by a hot CPI inflation report on Friday and a steep sell-off in cryptocurrencies over the weekend. 

Kolanovic doesn’t think the long-term secular bull market in stocks is over, and pointed to a few more reasons why it makes sense for investors to remain bullish on equities. “We see strong supports from low investor positioning, depressed sentiment, and corporate buyback inflows,” Kolanovic said. 

Corporate buybacks are expected to reach a record $1 trillion this year, according to estimates from JPMorgan, which speaks to the financial strength of most corporate balance sheets. 

Kolanovic ultimately expects a flat return for the US stock market in 2022, which would equate to the S&P 500 surging nearly 30% in the second half of the year. To take advantage of that type of rally, Kolanovic advises against indiscriminate buying of risk assets and instead suggests investors hold a portfolio filled with exposure to commodities, innovation technology, and biotech stocks, among others. 

“We maintain a positive view as record dispersion provides opportunities. While some market segments are trading near all-time highs, such as Defensives, others are near all-time lows such as innovation, China ADRs, small caps, energy, biotech,” Kolanovic said, adding that high valued defensive stocks won’t hold up well in a prolonged downturn.