While U.S. stocks have advanced in 2018, most overseas stock indices have suffered declines, sparking continued bullishness about the U.S. equities markets. Nonetheless, Marko Kolanovic, the global head of macro and quantitative research at the JPMorgan division of JPMorgan Chase & Co., is advising investors to reduce holdings of U.S. stocks and commit more funds to emerging markets equities, Bloomberg reports. This is a dramatic step for the largest U.S. bank to take, given that U.S. stocks have more than quadrupled in value since their financial crisis lows in March 2009. U.S. stocks have continued to surge ahead in 2018, rebounding from a sharp correction earlier this year, and thus far have defied ominously bearish warnings from some notable market gurus.
"The large U.S. fiscal boost this year, as well as the delayed positive impact of weak USD and low rates from last year created a 'sugar high' for U.S. assets this year,” Kolanovic and his team stated in a note to clients, as quoted by Bloomberg. "We expect convergence of macro fundamentals between U.S. and international markets in the coming quarters; with equity markets tending to price forward fundamentals by six to 12 months, the time for the rotation may be now," they added.
JPMorgan Is Worried Despite U.S. Stocks' Solid Gains
|S&P 500 Index (SPX)||8.7%|
|Dow Jones Industrial Average (DJIA)||6.3%|
|Nasdaq Composite Index (IXIC)||15.3%|
|Russell 2000 Index (RUT)||11.0%|
Source: Yahoo Finance, calculated through the open on Sept. 19.
Trade War Impact
Investors are concerned that several factors could push stocks down. Last week, JPMorgan warned that bilateral tariffs of 25% could cut the combined EPS figure for the S&P 500 by up to $10, per Bloomberg, which notes that the consensus estimate for 2018 is $165 per share. In his recent note to clients cited above, Kolanovic also wrote that "U.S. stocks and dollar assets...acted as trade war 'safe haven' so far," but "the trade war and asset outflows already impacted foreign assets, creating an FX advantage and attractive valuations."
The Next Financial Crisis
Nouriel Roubini, a professor of economics at New York University (NYU), earned widespread recognition by warning about the factors that eventually produced the last major financial crisis, in 2008. Today he sees a variety of danger signs, in addition to trade frictions. These include slowing economic growth, ill-timed fiscal stimulus, and excessive asset valuations, among others. (For more, see also: Roubini: This Will Trigger the Next Crisis.)
Meanwhile, Nobel Laureate in economics Robert Shiller of Yale University, developer of the CAPE ratio to analyze historic stock market valuations, sees "bad times in the stock market" going forward. While he's not predicting a market crash or a financial crisis, he is confident that the returns on stocks will be sharply lower in upcoming years, in order to bring them back in line with long-term trends. (For more, see also: The Stock Market Is About to Turn Ugly for Investors: Shiller.)
Fund Managers: Bullish on America
To be sure, JPMorgan's call for a rotation out of U.S. stocks flies in the face of new surveys showing most big investors are bullish on U.S. stocks. According to the latest Bank of America Merrill Lynch Global Fund Manager Survey, nearly 70% of respondents named the U.S. as their most favored region, the highest level in 17 years, Barron's reports. (For more, see also: Jamie Dimon: Fed QE Strategy May Cause a Market Panic.)
Another team at JPMorgan has developed a comprehensive set of recommendations to help investors protect themselves in the event of an economic downturn, and the bear market that is likely to accompany it. Their advice covers investments in stocks, bonds, commodities and currencies. A key difference from Kolanovic is that they recommend going underweight in emerging market stocks versus developed market equities. (For more, see also: 4 Ways to Avoid Big Losses in the Next Recession: JPMorgan.)