A major Wall Street analyst is warning of an imminent market downturn, despite the unprecedented rally being seen in risk assets over recent weeks. Marko Kolanovic, a senior strategist at JPMorgan Chase, has warned that risk sentiment could be reversed as markets begin to retest lows from last year over the coming months. Kolanovic believes that the market is experiencing the calm before the storm, with the inflows into stocks over recent weeks making little sense. He believes that they are largely being driven by systemic investors, a short squeeze and a decline in the Cboe Volatility Index.
Kolanovic has a mixed record when it comes to market predictions, being one of Wall Street's biggest optimists for most of the market selloff last year. However, he has since cut his equity allocation due to a soft economic outlook this year. Despite the concerns raised by Kolanovic, stocks have remained resilient so far this year, with the S&P 500 rising 7% in the first quarter after dropping nearly 20% in 2022. The gains across technology stocks have pushed the Nasdaq 100 up 20% since the start of January and into a bull market.
Kolanovic believes that the market is experiencing an accordion-like nature of risk sentiment, where restrictive rates are producing an issue for various carry trades. He suggests that the original source of stress, rates higher for longer, can re-enter the picture, and although central banks are still communicating, there is ground to cover on fighting inflation and pushing back against the market’s assumption of cuts. The strategist is not alone in his warnings, with many experts predicting that the market will experience a downturn soon. However, with $15 billion of shorts still to clear, Citigroup strategists believe that this could support markets in the near term.
