Dow Today – Recession Fears Are Overdone in Small Caps, JPMorgan’s Kolanovic Says
(Bloomberg) — JPMorgan Chase & Co. strategists led by Marko Kolanovic say it’s time to buy beaten-down stocks such as small caps after those companies priced in an economic recession that’s unlikely to come true.
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“Many market metrics such as recent performance of high vs. low beta stocks and valuations of small caps are already fully pricing in a recession — something we do not see materializing,” Kolanovic wrote in a note to clients. “The equity market sell-off is overdone in our view, and we reiterate our call to buy the dip, particularly in cyclicals and small caps.”
Read: Bearish Bets on Small Caps Ease With Analysts Seeing More Gains
Stocks rebounded Monday, after concern over Federal Reserve tightening sent equity benchmarks to one of the worst starts of a year in decades. The Russell 2000 of smaller companies advanced more than 2%, extending a similar bounce from Friday. Last week, the index entered a bear market as a selloff from its record topped 20%.
Kolanovic, a steadfast equity bull who favors cheap, economically sensitive stocks, said investor fear of a Fed policy mistake is misplaced. While JPMorgan now anticipates the U.S. central bank will raise interest rates seven times through March 2023, he expects the backdrop of above-trend economic expansion and corporate earnings to help the market weather the hit from the valuation front.
“While jitters around a Fed hiking cycle are understandable, this has been magnified by technical factors that can change quickly,” he wrote. “We could see a reversal of systematic outflows, pickup in buyback activity.”
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