'A once in a decade opportunity': JPMorgan breaks down how to take advantage of the largest bubble in modern history
- Marko Kolanovic, JP Morgan's global head of macro quantitative and derivatives research, sees an "unprecedented divergence" between market segments - one he says has created a "once in a decade opportunity."
- He also identifies the areas of the market that will benefit most, and the catalysts that will get the ball rolling.
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As an investor, the last word you ever want to hear is bubble. Its mere utterance is cringeworthy.
However, if you're lacking exposure to the assets that are teetering into this territory, these marketplace divergences can often make for appetizing opportunities. The hard part is getting the timing right.
After 10-plus years of gains, relationships between assets have been stretched to extreme levels - and JPMorgan sees one opportunity in particular that's primed for exploitation.
"Currently, there is a record divergence between value/cyclical stocks on one side, and low volatility/defensive stocks on the other side," Marko Kolanovic, JPMorgan's global head of macro quantitative and derivatives research, wrote in a recent client note. "The level of divergence is much more significant even when compared to the dot com bubble valuations of late '90s."
Kolanovic went on to declare the ongoing phenomenon a "once in a decade opportunity."
The chart below depicts the growing divergence between value and low-volatility assets - a relationship that hasn't historically experienced large fluctuations.
"While there is a secular trend of value becoming cheaper and low volatility stocks becoming more expensive due to secular decline in yields, the nearly vertical move the last few months is not sustainable," he said.
This sets the stage for what could be a large, fast-moving convergence. As for a potential catalyst, Kolanovic thinks stabilizing economic data, trade war progress, and Fed easing could do the trick.
JPMorgan's quant guru even took it a step further, identifying the areas of the market that could benefit from such a shift. In his mind, a hungry investor looking for sharp gains could do a lot worse than monitor these areas for a potential upside explosion.
"This rotation would push significantly higher all the laggards such as small caps, oil and gas, materials, and more broadly stocks with low P/E and P/B ratios," he said.
At this point, only time will tell if Kolanovic's convictions come to fruition, or if this divergence continues to stretch even further.
John Maynard Keynes put it best when he said "the market can remain irrational longer than you can remain solvent." And the market always seems to find a way of humbling those who have the most irrevocable beliefs.