The coronavirus recession is almost over, Wall Street strategists say

Wall Street Coronavirus
New York Stock Exchange.

  • Wall Street strategists are increasingly optimistic that the pandemic is in its final phase.
  • JPMorgan said in February the crisis will “effectively end” in 40 to 70 days.
  • The “recession is effectively over,” Morgan Stanley said Sunday.
  • Visit the Business section of Insider for more stories.

One year after the S&P 500 tumbled nearly 8% on COVID-19 fears, experts on Wall Street see the US bearing down on the finish line of the pandemic.

Declining case counts, vaccine rollouts, and expectations for new stimulus have lifted spirits in recent weeks. Economists have upgraded growth forecasts and investors continue to shift cash from defensive investments to riskier assets more likely to outperform during a rebound. Major banks’ strategists are taking it one step further.

The rapidly improving backdrop and “spectacular” profit growth in the fourth quarter signal “the recession is effectively over,” Michael Wilson, chief investment officer at Morgan Stanley, said Sunday.

“At the current pace of vaccinations and with spring weather right around the corner, several health experts are talking about herd immunity by April,” he said in a note. “It’s hard not to imagine an economy that’s on fire later this year.”

JPMorgan made a similarly bullish claim late last month, telling clients it doesn’t expect new COVID-19 strains to dent its positive outlook. The spread of new variants is still overshadowed by the broader decline in cases, the team led by Marko Kolanovic, chief global markets strategist at JPMorgan, said.

The rate of vaccination implies the pandemic will “effectively end” in the next 40 to 70 days, they added.

To be sure, there’s plenty of progress to make before the pandemic is no longer a public health threat. The US reported 98,513 new COVID-19 cases on Monday, lifting the seven-day moving average to 64,722, according to The New York Times.

And while the country is averaging 2.17 million vaccine administrations per day, reaching herd immunity at the current rate would still take roughly six months, according to Bloomberg data, which gauges how quickly the US can vaccinate 75% of its population.

Herd immunity is widely considered the most effective way to defeat COVID-19. Yet Wall Street’s more bullish forecasts suggest a mix of vaccinations and continued precautions could crush the virus in a matter of weeks.

Officials have warned that, while accelerated growth is on the horizon, there’s work to be done before the US stages a complete recovery. Reopening and new stimulus may fuel a sharp increase in inflation, but such a jump will likely be short-lived and fail to meet the Federal Reserve’s target, Fed chair Jerome Powell said Thursday.

The labor market also has “a lot of ground to cover” before reaching the central bank’s goal of maximum employment, Powell added. The chair indicated that, along with a lower unemployment rate, the Fed would need to see improved wage growth and labor-force participation before tightening ultra-easy monetary conditions.

Others are more optimistic. Treasury Secretary Janet Yellen said Monday that the $1.9 stimulus package nearing a final House vote can “fuel a very strong economic recovery.”

“I’m anticipating, if all goes well, that our economy will be back to full employment – where we were before the pandemic – next year,” Yellen said in an interview with MSNBC.

Read the original article on Business Insider

Wall Street’s favorite volatility index is the latest stock-market bubble, JPMorgan’s quant guru says

trader worried
  • The Cboe Volatility index – or VIX, commonly known as the stock market’s fear gauge – is the latest bubble to form, JPMorgan’s Marko Kolanovic said.
  • The forward-looking gauge of expected price swings currently trades with an 18-point spread to S&P 500 realized volatility, a historically high reading.
  • Precedent suggests the gap will lead to weaker volatility and rising stock prices, Kolanovic said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The latest bubble in the stock market isn’t a stock at all, but Wall Street’s favorite volatility metric, Marko Kolanovic, global head of macro quantitative and derivatives strategy at JPMorgan, said Wednesday.

Stocks’ climb to record highs earlier in February triggered speculation around whether some sectors had grown overstretched. Elation over tech stocks, SPACs, and cryptocurrencies all prompted calls that the market was rife with bubbles.

Such concerns are largely overblown, Kolanovic said in a note to clients. The FANG coalition – Facebook, Apple, Netflix, and Google-parent Alphabet – has mostly traded flat for six months despite recovery optimism. The energy and financial names that have ticked higher in recent sessions still trade well below record highs.

However, the Cboe Volatility Index – or VIX, which is a reading of 30-day expected stock volatility – sits squarely in bubble territory, the quant expert said. The index provides an implied reading of future S&P 500 price swings calculated from options contracts. Yet the VIX is now decoupled from S&P 500’s underlying volatility, “indicating a bubble of fear and demand from investors looking to hedge or profit” from a potential sell-off, Kolanovic said.

The so-called fear gauge currently trades at a roughly 18-point spread with S&P 500’s two-week realized volatility, according to JPMorgan. That gap is in the 99.6 percentile over the past three decades, implying a historic disconnect between the VIX and the volatility it’s meant to measure.

Such instances typically happen after massive shocks in the VIX and give way to a decline in volatility, Kolanovic said. Historical data also suggests the S&P 500 will rise as the volatility index course-corrects, he added.

JPMorgan recommended investors sell the “VIX bubble” until such a correction takes place. The potential for new fiscal stimulus and ultra-loose monetary conditions make for strong macro fundamentals, and falling daily case counts suggest the US can soon recover from the pandemic. Additionally, the rotation from growth to value stocks is keeping the correlation between stocks low. While some continue to warn of growing risk in the market, funds are piling into stocks as price swings moderate, Kolanovic said.

“Low volatility drives inflows, triggering a positive feedback loop of a rising market and declining volatility,” he added.

Read the original article on Business Insider