JPMorgan's quant guru says stocks can withstand $130 oil and a further surge in bond yields
- The US stock market can withstand higher oil prices and interest rates, JPMorgan said in a note on Wednesday.
- "Markets would be fine with $130 oil and 250bp yields," JPMorgan said.
- The bank advised clients to buy the dip in stocks, excluding richly valued technology companies.
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A continued rise in oil prices and interest rates won't end the bull market in US stocks, JPMorgan said in a note on Wednesday.
The bank views the market as capable of withstanding a near doubling in oil prices to $130 per barrel, along with a rise in the 10-year US treasury yield to 2.50%, according to the note from Marko Kolanovic.
Oil and natural gas prices have surged in recent weeks as an energy crisis in China and Europe has led to rolling blackouts, energy rationing, and temporary factory shutdowns. Meanwhile, interest rates hit a four-month high on Wednesday amid rising inflation and fears of a potential US default on its debts.
But JPMorgan believes if the markets could withstand these pressures in the past, it could so so once again. The bank pointed to the fact that stocks, the economy, and consumers did just fine from 2010 to 2015, when oil prices averaged about $100 per barrel.
"Adjusting for inflation, consumer balance sheets, total oil expenditures, wages and prices of other assets, we think even with oil at $130 or $150 equity markets and the economy could function well," JPMorgan explained. The bank argued that oil is cheap relative to other assets and that OPEC has been likely subsidizing global consumption over the past decade.
But rising interest rates have put the real dent in stocks over the past month, with high-growth technology stocks dragging the Nasdaq 100 down as much as 8% from its record high. Again, that's of no concern to JPMorgan, at least not yet.
"We think markets can absorb higher rates, and we don't expect a broad market selloff unless yields were to rise above 250 to 300 basis points [on the 10-year US Treasury], which we don't foresee in the near term," JPMorgan said. The 10-year US Treasury yield hit a high of 1.57% on Wednesday.
To take advantage of the current market sell-off, JPMorgan is advising clients to buy the reopening trade, or stocks in cyclical sectors like energy and financials, while avoiding richly valued technology stocks.