There are bulls, and there are bulls — and this highly regarded JPMorgan strategist has just made a provocative call on the energy prices the stock market can absorb.
On Thursday morning, crude was trading below $77 per barrel, and the 10-year yield was 1.54%.
Markets have struggled in reaction to a surge in bond yields, that in turn has been driven at least in part by the European energy crisis that has spilled over into crude. Though up on Wednesday, the tech-driven Nasdaq Composite
has retreated 6% from its record high set in September, and the S&P 500
was 4% below its peak.
To Kolanovic, the chief global markets strategist at JPMorgan, the current energy and supply chain issues do not jeopardize but reinforces its rotation thesis. He says green policies have contributed to the current crisis, as it’s diverted capital from fossil fuel development, though at a certain point higher energy prices will boost traditional energy capital expenditure.
Oil at $130, or even $150, won’t derail the economy, given the health of consumer balance sheets and total oil expenditures, he argues. “Consumer balance sheets are now in a strong position and some reallocation of expenditures towards energy would not set back the economy and equity markets. At the low end of the income range, potential strain from high gas prices could be an issue, but it can easily be addressed with a small fraction of current stimulus plans,” says Kolanovic.
Investors should consider hedging for higher oil prices. That could come from going long commodities and short bonds, going long energy stocks, or going long value and short growth. “The most likely outcome of the current energy crisis is increased production at significantly higher energy prices, which would stabilize the global economy and energy infrastructure, but also temporarily slow down the energy transition,” he says.
He leaves the “high-multiple growth sectors” like the Nasdaq 100
from his buy-the-dip advice. “Our highest conviction ideas remain energy (equities and commodity), materials, industrials and financials, and reopening, COVID-recovery, reflation and consumer themes,” said Kolanovic.