(Boursier.com) — The stock market is clearly not attractive in the current environment. The modest pullback in equities over the past few weeks does indeed not capture the sharp rise in rates since the last Federal Reserve meeting, according to JP Morgan Chase & Co teams. With real rates at the current level, history implies that the S&P 500 index is 2.5 times too expensive, says Marko Kolanovic, director of equity strategy at the bank.
“Risky markets are misaligned with politics and the cycle,” Mr. Kolanovic writes in a note picked up by ‘Bloomberg’, saying that higher and longer rates lead to effects such as demand destruction, decline in margins and depreciation of assets. While hawkish comments from the Fed and data signaling high inflation prompted bond traders to forecast much tighter monetary policy than expected, equities reacted more subdued, widening divergence between asset classes.
Great optimist last year when the stock market fell, Mr. Kolanovic has since changed his tune. He warned in early February that the stock market rally after the last Fed meeting was a ‘bear-market trap’. He also notes market complacency on geopolitics, a risk he sees coming to the fore again in the near future, with implications for the energy market, given the potential for a renewed Russian offensive in Ukraine and growing tensions with China. “The risk/reward ratio on equities remains poor in our view, reinforcing our call to ‘underweight’.”
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