News: Cut Stocks, Buy Gold, Hold Your Cash, JPMorgan’s Kolanovic Says

JPMorgan Chase & Co.'s Marko Kolanovic is advising clients to reduce their equity holdings and increase their cash positions due to several factors, including the unresolved debt-ceiling negotiation, heightened risks of a recession, and a hawkish stance by the Federal Reserve.

Kolanovic, leading a team of JPMorgan strategists, has reduced their allocation to stocks and corporate bonds while increasing their cash holdings by 2%. Additionally, they have made adjustments within the commodities portfolio, shifting from energy to gold as a safe-haven asset and as a hedge against the debt-ceiling issue. These moves aim to strengthen JPMorgan's defensive stance.

Although there are hopes for a swift resolution to the US debt ceiling, Kolanovic highlights that risk assets, including credit and commodities, are trading near the lower end of their ranges for the year, despite a rebound last week. He mentions that while equities are trading close to their yearly highs, their model portfolio has incurred losses for the third time in four months.

As investors await clarity from Washington on measures to avoid a catastrophic default, US stocks have remained stagnant. President Joe Biden and Republican House Speaker Kevin McCarthy had a productive discussion but did not reach a deal.

Kolanovic, previously known for his bullish stance in 2022, has changed his outlook due to a deteriorating economic situation this year. The bank has reduced its model equity allocation in mid-December, January, March, and now May.

Kolanovic and his team point out that equities seem disconnected from bond markets and weakening economic data, along with the risks associated with the debt ceiling. They highlight a divergence between rate markets anticipating potential Fed cuts, equity markets interpreting those cuts as positive for risk, and the Fed's more hawkish rhetoric. This disparity is expected to close, potentially impacting equities negatively as rate cuts are likely to occur in a risk-off environment. If rates remain higher, they could weigh on equity multiples and economic activity.