JPMorgan Goes Underweight Stocks "For The First Time This Cycle", Says To Buy Gold

Tyler Durden's picture

Less than 24 hours ago we presented the latest reason by JPM's Mislav Matejka explaining why the equity strategist refuses to buy this market, to wit: "equities are down ytd, but notably the ’16 P/E is not much cheaper today than it was at the start of the year. In fact, for the US, the P/E multiple is currently higher than it was on 1st January, at 16.8x vs 16.6x then."

Fast forward to today when we read something rather stunning: in a dramatic conversion, after moving to Netural on equities just a month ago, JPM is as of this moment underweight equities "for the first time this cycle." Additionally, JPM is also Underweight such highly correlated to stocks (and China) commodities as gas, oil, and copper, but in a surprising reversal is now, perhaps most importantly, overweight gold.

The details from JPM's Jan Loeys:

Equities, credit and commodities have all rallied in the last three weeks, as some of the immediate threats to the world economy have faded from attention, possibly only because the bad earnings season has wound up. But, to us, the fundamentals of growth, earnings and recession risk have not improved, and if anything have worsened. We remain wary of the near-empty ammo box of policy makers.


Our 12-month-out US recession odds have risen to 1/3, while equity-implied odds have instead fallen to near 1/5. But even with no recession this year or next, we see US earnings rising only slowly by low single digits and see little to boost multiples. The eventual recession should bring US stocks down some 30%, creating a strong downward risk skew to returns over the next few years.

How to trade's JPM's new reco: "We use the rally in stocks to sell it and go underweight stocks, versus HG corporate bonds and cash. The strong rebound of the past few weeks does create near-term momentum, and thus keeps our first UW small. Low growth and easy money and the reduced potential for capital gains should raise the demand for income. We focus this on US HG given its still over 4% yield, a rarity in the HG world. We are not ready to pursue FX or commodity carry at this point, but like high-dividend stocks. Within fixed income, we are now long duration."

But most stunning is that in the overall asset allocation we spot the following (bolded and underlined):

Our portfolio is now 5% UW Equities, the first UW this cycle. We retain a 10% OW of Credit, moving Bonds to Neutral, and Cash to OW. Commodities stay UW, but we move it to a small -1%, given recent momentum and volatility. Within Equities, be OW defensive sectors. Given that our risk focus is now switching from Chinese debt to US corporate caution, we go OW EM equities. In Credit, OW US HG, US banks, and sterling HG against EUR and EM. In Commodities, be short gas oil and base metals but OW gold.

The full breakdown:


And some more details from the report:

  • We go Underweight Equities for the first time in this cycle.
  • Equity bearish forces include poor macro valuation vs. our recession risk for this year; negative fundamental momentum; and limited profit and return upside relative to the downside we see from the eventual recession.
  • The limited upside we see on stocks under our no-recession modal forecast is driven by still dismal productivity growth and the inability/unwillingness of monetary and fiscal policy makers to stimulate growth.
  • Within equities, we are now OW defensives and large caps, but go OW EM as risk focus is now on the US and away from China.
  • We retain an OW of HG corporate debt given its better macro valuation and better ability to absorb negative economic news. Move long duration in global bonds.
  • OW Cash, but stay UW Commodities, though cut in half.

After January' traumatic start for risk markets, early February brought another low, but was then followed by a rebound over the past two weeks that pushed global stocks within 4% of their start of the year level. Commodities did virtually the same, with oil still net down but industrial metals net up on the year.

From risk-on/risk-off to recession-near/recession-far.  The debate among investors is not about whether we are in a risk-on or risk-off mode, but whether we are nearing a recession or are still far off. The end-of-cycle scenarios we have discussed here since early last year started with a Fedbehind- the-curve-on-inflation, to a China and EM debt crisis, and then more recently to one focused on US corporate caution, driven by falling profit margins and a policy maker without ammunition to counteract corporate retrenchment.

Market participants focus on the binary risk of recession or not because they know that risk markets – equities foremost, but also credit and commodities – have a cyclical pattern and see their greatest price falls generally in a US recession.

Over the past half year, investors have been toggling between these three “economy killers”, trying to judge odds of each over the next  year. The generally weak tone of Q4 earnings reports across the DM world in January and early February raised the risk of corporates retrenching in response to falling profits. When the bad earnings news stopped, only because the earnings season wound down, risk markets rebounded, supported also by news that China started injecting more liquidity and credit into its economy, thus reducing downside risk perception. Soothing Fed language and the resulting rally in US duration also helped.

The issue for investors is never whether a recession is coming. In a sense, it is always is coming as no economic expansion lasts forever. The issues are instead when is it coming; how much damage it will do; and whether markets still have enough upside before the recession to make up for the eventual losses during the downfall.

As we have discussed here frequently, US equity markets have in the post-war period never reached their highest level more than 13 months before the onset of recession. This is largely because there is little visibility more than one year out, and there has at least in the past generally been the conviction that if a shock were to hit the economy, policy makers would have time to provide sufficient stimulus to offset its impact.

Our economic models, based on past relationships which have never seen a US expansion lasting more than 10 years, are giving us now a 1/3 probability that the US expansion will end within 12 months, 2/3rd within 2 years, and close to 100% within 3 years. The latter should in reality be lower, as other countries have seen expansions last more than 10 years, and the post war US experience has seen only 10 cycles.

* * *

If the next 12 months also do not produce a recession, then profits should rise again, but probably only by low single digits gains, unless the economy would suddenly show a significant acceleration in productivity growth, something that would be quite a surprise given lackluster growth the past 5 years. As a result, in the no-recession scenario for the next two years, US earnings are unlikely to grow much faster than 5% pa, without a significant acceleration in growth.

It is always possible that equity prices will rise faster than earnings on optimism that tends to rise late cycle. Here we run into the problem, though, that such optimism and multiple expansion face the growing realization among investors that monetary policy makers are running out of ammunition and that new policy innovation from here might not have much impact, assuming it even does not do more damage than benefit. Fiscal policy stimulus in DM, aside from China, will probably only be used after economies have already fallen into recession. Hence, we are loath to rely on multiple expansion as the driver of higher equity prices at this point.

If the upside is limited, what is the downside in the eventual recession? We discussed last month that, during a recession, US large-cap are likely to drop by close to the average recession fall of 32% seen during the postwar period, given its multiple at the peak, the depth of the recession and the likely fall in earnings. Given the reduced leverage in the US economy among banks and households in this cycle, we expect any recession to be shallow. But the lack of immediate monetary stimulus in such a scenario at the same time tell us this recession may be drawn out, giving us a peak-to-trough fall that may well be similar to past recessions.

If the recession starts this year (not our modal view), then the S&P500 would likely fall some 30-35% from last year’s peak of 2,134, to somewhere between 1,400 and 1,500. If instead the recession is in one of the following two years, then we would expect the same % falls, but from levels that would be 5-10 % higher than today and thus to levels still well below today. Hence, we have a view that upside from here is not very great and that eventually over the next few years, we should be some 20% lower than today. The modal price year-end forecasts of our DM equity strategists are near today’s levels, but each sees a significant downward skew around these.

How to invest with a downside risk view on global equities? The first we have done here is to go Underweight equities in a global cross asset portfolio, after last month having gone to Neutral. In our long-short, we were already short US equities versus US HG credit spreads, volatility weighted, and add now a short US equities against US HG corporate bonds, also volatility-weighted.

Within Equities, we are OW two defensive sectors, US large caps versus small caps and global Defensive versus Cyclical sectors. Given the now concentrated focus on US economic risk and some signs of monetary and fiscal policy stimulus coming in China, we go OW EM equities versus DM. The EM-DM split has not shown much directionality in the past and we think EM can outperform even in a bearish environment for global stocks.

In Bonds, we are now long duration, not just to match our equity bearishness, but also as our rule-based models provide a long-duration signal.

We have been UW Commodities and in particular oil, on a view of systematic excess supply of crude. We still have this view but find that oil prices have now been moving up over the past 6 weeks by a cumulative 25%. Part of this is due to the same reduced economic fears that may be driving stocks up over the past few weeks. Given the still high correlation between stocks and oil and the likelihood that some of the recent rebound in oil is due to supply disruptions in Iraq, we reduce the size of our oil shorts.

* * *

Stay long Dec’16 CME gold

At the end of January, we marked our gold price forecasts higher on a delayed Fed hike and USD decoupling with our 4Q2016 average now at $1,250/oz Moreover, NIRP policy ex-US and stickiness in US inflation could push US real bond yields lower and further support gold prices as gold’s best performance has historically occurred during a low and falling US real interest rate environment, with monthly returns averaging 1.4% compared to the long-run average of 0.4%

Went long Dec’16 CME gold at a price of $1,194.60/oz on February 10. Trade target is $1,300/oz with a stop at $1,015/oz. Marked at $1,233.80/oz on March 1 for a gain of $39.20/oz or 3.3%.

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Obadiah's picture

Dammit!!  Bad day to start sniffing glue and/or look at my new shiny  dammit

HopefulCynical's picture

Games within games within games...

Troy Ounce's picture



Buy as much synthetic gold as you can. Go for it JPM!

Cognitive Dissonance's picture

Notice they said to 'own' it, not 'possess' it.

Big difference.

mandalou's picture

JPM is lying their asses off. A few weeks ago right here on ZH, Jami and co admitted they were in long oil trades and were suffering for it. Then we get a magical carpet ride on shit data world wide. They are full of shit and are doing the exact opposite. The move up in oil is for the members of the tribe who fucked up to unwind.

GRDguy's picture

JPM picked up some Canadian gold recently and they want to dump it quick.

Kirk2NCC1701's picture

Didn't they send the Memo to the Canadian Fin Min?

He is selling the nation's Shiny.  To JPM perhaps, if not to China or Soros/Israel.

gcjohns1971's picture

When someone buys, someone else sells.

That's the way it works.

But, really, when they've grown so comfortable in the apparent profitability of 'something-for-nothing' via fractionally reserved paper scams...they come to believe in their own sales pitch, eventually.

That's how you know that the gig is up.

Davidduke2000's picture

Now I am starting to get worried about gold, if Jp morgan is telling people to buy gold, it's bad news, they are planning a major attack on gold which explains why Canada dumped all its gold.

Dr. Engali's picture

There's a big difference between gold, and the paper gld the Morgue s pushing.

KesselRunin12Parsecs's picture

They think you should store it safely in a BOOST vault.

delete entry's picture

its not always that way. i am buying gold(when under 1180ish) now for the 1st time in 6+ years. its one of those things i get right historically

delete entry's picture

er paper gold anyway dont hate me i needed the quick $

Dr. Engali's picture

Buy gold? Not from Canada I won't be. I already own more than they do.

SoilMyselfRotten's picture

Me too, i just bought a 1/4 ounce eagle

KesselRunin12Parsecs's picture

My front toof has more gold than Canada

PeakOil's picture

Not really - if you look in the footnotes the "0" gold holdings is really 77 oz. Nice try though!

sandman4224's picture

Smartest guys in the room at work again.

LawsofPhysics's picture

Okay, so TPTB are going to kill paper gold, so what?

E.F. Mutton's picture

Uh-oh, they must have the REAL Orange Crop Report

New Hampshire is Best Hampshire's picture

Overture to the marriage of Figaro.


KesselRunin12Parsecs's picture

LaGarde is the new Beeks [orange is the new orange]

silverer's picture

When these guys say "buy gold", it must be worse than we think.

pillory-hillary's picture

underweight for JPM, thumb on the scales for ewe

besnook's picture

let's see what happens to all those dividends. short dividends.

lemontree2's picture

This will somehow be bullish. For hawks and stawks.

aliki's picture

pretty much the exact opposite of that jamie dimon said this morning.  some would consider that the perfect hedge: research goes 1 way, CEO goes the other.

TrumpXVI's picture

The Hated metal.

Fear & Loathing

discopimp's picture

Anybody know JPMorgan's history of pulling a Goldman Sacs?  Can this be trusted?

KesselRunin12Parsecs's picture

Jamie says 'SELL' to the proles... I say 'CELL' to Jamie

RabbitChow's picture

So Canada sold, and JPM says buy.  Or did they already buy, and not they're telling us to try to go out and find some?  I'll stick with Gainesville.

taketheredpill's picture

Short commodities but O/W EM equities?

Conax's picture

I hate those guys.

~Dean Vernon Wormer

zeroaccountability's picture

When Gordon Brown sold 58% of UK's gold, we all know what happened afterwards.....


It was subsequently dubbed 'The Brown Bottom'.

Lost in translation's picture

I got scared.

So I bought more.

Which I plan to lose in a nearby lake because, you know, JP Morgan told me not to store PMs in my safe box.


Professional Side-Eyer's picture

Here in India all the gold shops nationwide have downed their shutters for the past two days to protest the government's introduction of a 1% Excise duty on Gold. This measure was unveiled in the new budget released last week on top of the already existing 10% import duty on Gold.

The gold shop owners are requesting that the Excise Tax be withdrawn. And if the government is intent on taxing gold imports, the protesters are asking that the import duty be increased from 10% to 11% instead of introducing an Excise Tax as the traders will then have to deal with two different departments and two different set of government parasites, oh excuse me, "officials".

All this means that I have been unable to do my scheduled silver bullion shopping this week.

Vin's picture

Why do we even pretend to follow these guys' advice?  They just look to suck us in with lies mixed with some truth. 

I should be working's picture

JPM analyst states fantacy PE is 16.235892345798 instead of 16.129387589347.

Who cares? The GAAP-TTM PE (ie based on fact) is a bit under 22x.  THE MARKET'S PE IS NOT 16!

honestann's picture

Soon gold will be awesome.

Once paper manipulations fail, silver will make gold look tame.