Kolanovic: “This Is What The Next Crisis Will Look Like”
There are two distinct parts to the latest, just released research note from JPM’s quant “wizard” Marko Kolanovic.
In the first part, the infamous predictor of market swoons takes on an unexpectedly cheerful demeanor, and explains why contrary to his recent market outlooks, near-term risks for a market selloff appear to have abated. First, he looks at the tax-related rotations within the market in the past month, and notes that in September “the administration drip-fed US tax reform news, which propped up the market and spurred large sector rotations.” As a result, “financials, Industrials, and Materials were up ~5%, Energy ~9% and Small Caps ~7%. On the other side of the Tax trade were bond proxies (Utilities, Staples, REITs) down ~2-3% and Technology-heavy Nasdaq that was down ~0.5%. These offsetting sector moves reduced the typically elevated September volatility to its lowest level since 1964.”
He then goes on to note that in addition to the tax rotations, “volatility was reduced as market rose and got pinned at the 2,500 level for most of the month (this level was popular with option sellers, leaving dealers locally long gamma).”
Picking up on what Deutsche Bank’s Aleksandar Kocic has been writing about in recent weeks, namely the apparent failure of “exogenous shocks to shock the market”, as shocks themselves become endogenous phenomena, Kolanovic also writes that in fading daily headline risk, “tax reform and infrastructure will remain a central focus for investors, and it seems that bits and pieces of information can still excite fund managers”, something he previously called the ‘Trump Put’ effect.
As a result, between rotations and fundamentals, the coast – at least for the near-term – appears to be clear:
“With the upcoming positive Q3 earnings season, uptick in global growth, promise of tax reform keeping fundamental funds invested, and low volatility keeping systematic strategies invested, near-term risks of a sell-off have abated.”
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