Stay-at-Home Stocks vs. Cyclicals

By Dima Kulakov

JPMorgan’s chief global markets strategist, Marko Kolanovic, who correctly called the March 2020 market bottom and the subsequent rebound, is sceptical about parts of the stock market where valuations are still inflated by pandemic measures and predicts a further sell-off.

“We still believe that there would be another leg lower in sectors that exhibited bubble-like behavior since the onset of the COVID-19 pandemic. Those include stocks related to COVID-19 lockdowns, renewable energy and EVs, crypto, hyper-growth and innovation stocks. While these segments experienced a significant correction early in the year, we believe that there will be another leg lower,” Kolanovic said.

Stay-at-home stocks such as Zoom Video, Peloton, and Teladoc lost 35-50% from their top valuations reached in late 2020 – early 2021. Industries like clean energy and electric vehicles also had rallied from March 2020 COVID-related lows supported by growing investor interest. The Invesco Solar ETF grew more than 230% last year and has fallen 17% year to date.

Kolanovic has a Ph.D. in theoretical physics and is known on Wall Street for applying alternative and quantitative data to predict the stock market’s ups and downs.

“The final level of correction is likely determined by convergence of valuations between these and equivalent traditional sectors,” he said.

The strategist is bullish on shares of companies sensitive to an economic recovery (called “epicenter stocks”), as he believes bond yields have bottomed. If he is right and bond yields start climbing (preferably slowly and steadily rather than precipitously, though), it creates an environment in which economic recovery related or cyclical stocks benefit the most.

The 10-year Treasury yield (a benchmark rate) recently hit a low of 1.15% due to rising concerns about a potential economy slowdown because of the delta variant – cautious investors flock to the safety of US government bonds (as investors buy more bonds, bond prices rise and yields fall). The benchmark rate has since rebounded to above 1.3%.

“We believe that bond yields and cyclicals bottomed last week and are now on an upward trajectory for the rest of the year,” Kolanovic said. “While we believe that bond yields will increase significantly, the risk of a broad market sell-off driven by tech-bond correlation is not high and can be mitigated. This is another reason why we prefer cyclicals, international stocks, and value.”