- Investors should take advantage of the recent rally in stocks by trimming the equity exposure and buying commodities, according to JPMorgan.
- Long-time bull Marko Kolanovic said the decline in commodity prices is worth buying as markets see less risk of a recession.
- Kolanovic is still bullish on stocks in the long-term and sees potential upside for equity prices into year-end.
Long-time equity bull Marko Kolanovic of JPMorgan thinks now is a good time to take advantage of the ongoing recovery in the stock market by trimming exposure to stocks and shifting those proceeds to commodities, according to a Monday note.
"Given diminishing risks of a more negative shift in behaviour, low positioning in risky assets and widespread negativity in sentiment, as well as robust nominal GDP and revenue growth, risky assets have seen a recovery. With commodities lagging other risky assets, we shift some of our risk allocation from equities to commodities," Kolanovic said.
While the S&P 500 has rallied more than 10% from lows in mid-June, commodity prices have sold off considerably at a time when fears of a recession are starting to recede. That means the risk-reward profile for stocks is getting less attractive relative to commodities as equity and credit markets "price out recession risk," Kolanovic said.
So buy the dip in commodities, according to Kolanovic, as demand is likely to remain robust going forward if a recession doesn't materialize. WTI Crude Oil prices have dropped by more than 25% from their early-June peak, while copper prices have fallen 28% from their March high. Kolanovic expects oil prices to reclaim the $100 per barrel level in the second half of this year.
"With commodities lagging other risky assets, we shift some of our risk allocation from equities to commodities," Kolanovic said. "Overall, the global commodity inventory crunch has accelerated even as BCOM has slumped off highs, at close to pre-conflict levels."
But Kolanovic's allocation decision to trim equities in order to buy commodities doesn't mean the equity strategist has turned bearish on the long-term outlook for stocks. Kolanovic still maintains an "overweight" allocation to stocks and still sees more upside into year-end.
"We continue to look for upside into year-end for a number of reasons: absolute and relative valuations, low positioning, overly bearish sentiment, Fed hiking being priced-in, strong USD peaking, firm housing prices, and consumer cushioned by excess savings from COVID period," Kolanovic said.
Kolanovic also pointed to resilient corporate earnings and said valuations are in-line with median multiples seen when bond yields were around 3%, as they are today. "Valuations look attractive, both in absolute terms and relative to fixed income," Kolanovic said.
The S&P 500 is down about 13% year-to-date, while the Bloomberg Commodity Index is up nearly 20% over the same period.