JPMorgan’s Kolanovic Says Stocks Can Handle $130 Oil, 2.5% Yield

(Bloomberg) -- While global stocks sell off amid a spike in bond yields and surging energy prices, JPMorgan Chase & Co. strategists led by Marko Kolanovic are offering some soothing words: The market and economy can live with much higher rates and oil prices. 

West Texas Intermediate crude futures have jumped above $75 a barrel to the highest level since 2014. But looking at recent history, the U.S. economy and American consumers did just fine from 2010 to 2015 when WTI averaged $100, the strategists note. In fact, adjusting for things such as inflation and consumer spending power, oil can leap to $130 or $150 without causing much trouble, their model shows.  

Meanwhile, the fears of higher yields are overdone, they say. Given the earnings power of corporate America and the relative valuation premium of equities over bonds, the strategists believe the market can absorb 10-year Treasury yields as high as 2.5% -- or about 100 basis points above current levels.  

“We don’t expect a broad market selloff unless yields were to rise above 250-300 bps (US 10y), which we don’t foresee in the near term,” Kolanovic and his colleagues wrote in a client note Wednesday. “We do not believe that the current price of energy will have a significant negative impact on the economy.” 

With the S&P 500 mired in its first 5% drawdown in a year, the strategists again advised investors to buy the dip. Stocks have sold off as the Federal Reserve prepares to cut its emergency monetary support and energy prices soar. The debt ceiling impasse and lingering worries about China’s real estate market are adding to investors’ unease.

Kolanovic has been one of the stock market’s staunchest bulls, advising investors to buy risky assets amid a continued recovery from the pandemic. Such optimism stands out as Wall Street is sending increasingly dire warnings. 

“We believe that this was the last significant wave, and an effective end to the pandemic,” he wrote, reiterating his preference for economically sensitive shares over richly valued technology and growth stocks. 

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