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

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  • 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.
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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.

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JPMorgan still thinks the S&P 500 can rally another 12% this year as US consumer spending explodes for these 7 reasons

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  • Even as stocks sit near record highs, JPMorgan strategists see seven drivers lifting the market even further.
  • The bank reiterated its S&P 500 target of 4,400 on Friday, implying a 12% leap through the year.
  • Detailed below are the reasons the bank is still bullish, from strong household saving to a healthier labor market.
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Stocks leaped to record highs several times throughout the week. JPMorgan sees a handful of reasons even higher levels are in store.

Investors faced a fork in the road earlier this month. New stimulus backed by President Joe Biden and Democrats stands to supercharge the US economic recovery, but more conservative experts raised concerns the package could dangerously lift inflation. Traders largely ignored such fears, but stocks elevated valuations now pose a risk of their own.

Strategists led by Dubravko Lakos-Bujas maintain economic reopening and fresh fiscal support trump all. The team reiterated its S&P 500 target of 4,400 on Friday, implying a roughly 12% jump from current levels. The outlook already hinged on a strong consumer recovery, but several new factors bolstered the bank’s call.

Here are the seven reasons JPMorgan sees spending bouncing back and aiding the stock market’s rally.

(1) Swift reopening

Tumbling COVID-19 case counts and continued vaccine rollouts place the US economy mere months away from reopening much of its economy, JPMorgan said. The strategists expect the pandemic to “effectively” end over the next 40 to 70 days.

(2) New stimulus

Roughly $30 trillion in stimulus has aided the global economy through the pandemic, and Democrats are charging on with efforts to approve another $1.9 trillion package. That deal can further accelerate the rebound, particularly by prioritizing employment, JPMorgan said.

(3) Pent-up savings

US households are sitting on record cash reserves with savings totaling about $11 trillion, according to the bank. The unwinding of such funds can revive small businesses and spur new hiring.

(4) Ballooning wealth

Markets’ health through the pandemic can further boost Americans’ wealth. JPMorgan estimates rising values across home equity, pensions, and 401k plans will add up to $48 trillion in total net worth.

(5) Healthy household debt levels

Americans will also be coming out of the pandemic with robust balance sheets. The debt service ratio sits at a four-decade low, and delinquency rates for consumer loans are at historically low levels, JPMorgan said.

(6) Improved job market

A falling unemployment rate, growing average work week, and possibly higher minimum wage will all contribute to a healthier labor market, the strategists said. 

(7) Millennial bump

A record 5 million millennials will reach the inflection point of seeking homeownership, according to the team. Increased spending from this group will shift more savings into the economy.

Read more: JPMorgan says buy these 40 stocks set to soar as bond yields make a surprising jump higher

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Stocks could stumble in early 2021 as investor sentiment surges past market fundamentals, Goldman Sachs says

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Traders look on after trading was halted on the floor of the New York Stock Exchange (NYSE) in New York, U.S., March 18, 2020

  • Goldman Sachs’ Sentiment Indicator – which measures how far stock prices are outpacing fundamentals – climbed to two standard deviations above its average on Friday, signaling heightened risk of near-term market weakness.
  • Rising COVID-19 hospitalizations and weak economic data add to the odds of “a modest positioning driven pullback in the next month,” strategists led by Arjun Menon said in a note.
  • The bank still stuck with its forecast that the S&P 500 will rise 16% throughout 2021, hinging the forecast on expectations of widespread vaccine distribution.
  • Such stretched positioning historically led to market weakness over the next one to four weeks, Goldman said. Still, stock returns typically turned positive after two months, the team added.
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Unusually optimistic investor sentiment endangers the stock market’s near-record levels heading into the new year, Goldman Sachs strategists said Monday.

Positioning in stocks is at “extremely stretched” levels as prices rally further beyond equities’ fundamentals, the team led by Arjun Menon said in a note to clients. The bank’s Sentiment Indicator – which tracks stock positioning among retail, institutional, and foreign investors – landed two standard deviations above average on Friday, representing a 98th percentile reading since 2009. The gauge last hit that level in September 2019, months before the coronavirus ended the US’s longest bull market in history.

Readings above one standard deviation “historically signaled stretched equity positioning,” the team said. Such positioning tends to present a headwind to short-term returns when economic growth is slowing or stable, they added.

“The recent surge in COVID hospitalizations and weaker-than-expected economic data therefore increase the risk of a modest positioning-driven pullback in the next month,” the Goldman strategists said.

Read more: Morgan Stanley’s consumer analysts share 13 high-conviction global stocks to buy to capitalize on the continuing economic recovery

Stocks are trading just off of record highs, most recently falling on concerns of a delayed stimulus package. Enthusiasm around President-elect Joe Biden’s victory and progress toward approving a coronavirus vaccine boosted outlooks on Wall Street through November and fueled a shift in investor capital from growth stocks to riskier value names.

The team still holds a largely bullish outlook toward 2021 market returns despite near-term risks. The bank doubled down on its call for the S&P 500 to hit 4,300 by the end of 2021, implying a 16.3% rally from current levels. Widespread vaccine distribution throughout next year will drive a V-shaped recovery, and any risks from stretched positioning will fade in a few months, the team said.

In prior instances when Goldman’s Sentiment Indicator landed two standard deviations above average, S&P 500 returns were weak in the next one to four weeks but almost always positive after two months, the bank added.

Even with equity allocations at their currently heightened levels, the strategists expect investors to continue pushing cash from money-market funds into the stock market. Cash yields are set to hold near zero for several years, and hopes for economic recovery will set stocks on an upward trajectory, the bank said.

Households and foreign investors are expected to be net buyers of US stocks throughout next year, with the former group poised to push $100 billion into the market. Mutual and pension funds will be net sellers, Goldman said.

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