Finance

JP Morgan’s trading guru says the bubble in defensive and tech stocks ‘will likely collapse’

Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York, January 24, 2020.

Lucas Jackson | Reuters

A bubble has formed in defensive and low-volatility stocks as coronavirus fears drove a record number of investors to those pockets of the market, according to JPMorgan’s quant guru Marko Kolanovic.

Since the coronavirus outbreak, hedge funds have shifted their allocation into low-volatility and defensive names on a record level, pointed out by Kolanovic, the bank’s global head of macro quantitative and derivatives strategy.

Defensive stocks are generally not tied to economic growth. They include utilities, health care and consumer staples stocks. JPMorgan reiterated its call to sell out of defensive assets and rotate into cyclical assets such as value stocks, commodity stocks and emerging markets.

“Bonds, momentum stocks, and low volatility stocks rallied – pushing the valuation spread between defensive and cyclical stocks to a level 2x worse than during the peak of the late-’90s tech bubble,” Kolanovic said in a note to clients on Wednesday. “The bubble we are describing is expressed in equity factors … We caution investors that this bubble will likely collapse, i.e. this time is not ‘different.'”

Kolanovic added some tech names are trading at “unsustainable valuations” supported by record level of speculative call option activity.

“Value stocks are typically on the other side of all of these trends that inflated this bubble,” Kolanovic said. The strategist had called the rotation into value stocks in September that rocked investors. He called it a “once in a decade” trade then.

— CNBC’s Michael Bloom contributed reporting.

Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.

Products You May Like

Articles You May Like

British PM Johnson in hospital for coronavirus tests but said to be still in charge
Coronavirus patients spend night on Navy hospital ship meant for non-infected New York patients
10-year Treasury yield heads for weekly decline as coronavirus crisis deepens
Walgreens earnings top estimates, as the drugstore chain says it can’t forecast the impact of coronavirus pandemic
There’s a lot of anxiety as small businesses worry the loan money will run out

Leave a Reply

Your email address will not be published. Required fields are marked *