One of Wall Street's biggest bulls is losing conviction on the stock market as the risk of a Fed policy error rises
Hollis Johnson/Insider
- One of Wall Street's biggest bulls is highlighting two big risks that loom for the stock market.
- JPMorgan's Marko Kolanovic said escalating Russia tensions and a potential Fed policy error dent his enthusiasm for stocks.
- "Most of the risks in 2022 are a result of policies... it all amounts to throwing rocks in glass house," Kolanovic said.
JPMorgan's Marko Kolanovic has been a steadfast bull throughout the stock market's more than 20% decline this year, but now some big risks are forming that he can't ignore.
In a Friday note, he admitted that increasing risks from the Federal Reserve and Russia are putting his firm's 2022 price targets at risk, which includes an estimate that the S&P 500 will surge upwards of 30% from current levels to 4,800 by year-end.
"While we remain above-consensus positive, these targets may not be realized until 2023 or when the risks ease," Kolanovic said.
A Fed Policy Mistake
Kolanovic made it clear that under Fed Chairman Jerome Powell, the central bank doesn't have the best track record in avoiding policy errors. "Since 2018 we have seen several errors that increased macroeconomic volatility."
In the fourth quarter of 2018, the stock market plunged 20% in short order as the Fed got too aggressive in its tightening policies amid a looming recession in the manufacturing economy due to former President Trump's trade war with China.
That error was followed by the Fed easing too much during the aftermath of the COVID-19 pandemic, which gave rise to a 2021 bubble in cryptocurrencies, NFTs, and innovation growth stocks, according to the note.
"A potential hawkish mistake followed after a dovish mistake makes for two mistakes rather cancelling out," Kolanovic said.
Now it looks like the Fed is on track to committing another policy error as it remains steadfast in its goal of raising interest rates to tame inflation, even as some indicators show inflation has peaked and the economy is weakening.
"Given the recent escalation in hawkish rhetoric, the likelihood of central banks committing a policy mistake with negative global consequences has increased, and this started showing in various cracks in currency and rates markets," Kolanovic said.
At this point, even if a policy mistake is avoided by the Fed, its overly hawkish actions could already be enough to delay a global market and economic recovery, according to the note.
Rising Russia Tensions
Kolanovic had remained optimistic that Europe would act as a mediator between Russia and Ukraine as it sought to protect itself economically and politically, with the conflict de-escalating during the fall and winter.
So far, that doesn't seem to be the case, and the recent sabotage of the Nord Stream gas pipeline is a signal that tensions are rising, not falling.
"The ramifications of this event are hard to fully assess, but many believe the current situation is similar to the Cuban missile crisis. Given these developments, a second assumption behind our positive view is now at risk," Kolanovic said. That could ultimately lead to a European recession that is deeper than originally thought.
While he is still bullish on stocks, and expects depressed investor positioning to serve as a bullish catalyst for higher stock prices, it could take longer than originally thought for his views to be realized.
"Most of the risks in 2022 are a result of policies: escalation of geopolitical tensions and violence, mismanagement of the energy crisis, damaging (instead of nurturing) of global trade relationships and supply chains, fanning internal political divisions, and more. It all amounts to throwing rocks in glass house," Kolanovic said.
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