Two days ago we shared the latest thoughts from Morgan Stanley’s QDS (quant and derivative desk) discussing what the “market bottom” may look like. Today we turn our attention to a similar line of inquiry, only this time from JPMorgan’s flow desk, courtesy of Andrew Tyler (full note available to professional subs).
“When is when?” for the market bottom?
From a flows perspective Nikos Panagirtzoglou feels that a protracted outflow is unlikely and from a positioning perspective John Schlegel and team highlight both the bear case from the bounce case.
The SPX closed at 15.8x consensus 2023 ($249) estimates and trades at 17.3x CY estimates ($228); the SPXs lifetime average P/E is 16.9x (BBG). Stocks are not necessarily cheap and it may be the case that investors require a larger discount before jumping in.
From a macro perspective, the China COVID lockdown situation will be adjudicated in a matter of weeks (or months) but one has to wonder about the RU/UKR situation now that we are seeing additional supply disruptions of commodity exports (natgas in this case), Russia beginning to punch back on sanctions (levelling their own), and with Sweden/Finland aiming to join NATO what is Putins reaction function?
Mapping back to the US, the more time spent at elevated inflation will increase the fear that the Fed eventually has to step-up its tightening efforts, which typically ends in a recession. The counterargument to this last point is, how much farther beyond neutral would the Fed have to go to counteract the elevated consumer cash pile?
Further, recessions typically are initiated by a credit crunch that leads to higher unemployment. Given the state of corporate balance sheets, how quickly could these conditions change to force some distress?
Next, looking at the latest equity fund flow data, JPM is skeptical of the idea that Aprils equity fund outflow, the highest outflow since March 2020, is only the beginning of a likely more protracted phase of outflows in reversal to 2021s record inflows.