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The Tell: Buy the dip, says JPMorgan. ‘Markets can handle higher yields’

Investors should buy the dip in the stock market as the selloff sparked by last week’s “hawkish surprise” in the Federal Reserve’s meeting minutes is arguably overdone, according to analysts at JPMorgan Chase & Co. 

Monetary policy tightening will probably move at a gradual pace, the analysts, led by Marko Kolanovic, wrote in a J.P. Morgan research note Monday. “Markets can handle higher yields.”

Minutes from the Fed’s December meeting released last week rattled markets as they showed the central bank considering raising interest rates sooner and faster against the backdrop of surging inflation. The yield on the 10-year Treasury note TMUBMUSD10Y, 1.761% was trading around 1.78% on Monday afternoon, up from around 1.5% at the end of December. 

“Higher bond yields should not be disruptive for equities, but rather support our call for a growth to value rotation,” the J.P. Morgan strategists said in their note.

Value stocks have been outperforming growth equities in recent weeks amid concern that rising interest rates will hurt market valuations of high-growth companies in the technology sector. 

The tech-heavy Nasdaq Composite Index COMP, +0.05% was trading lower Monday afternoon, but had recovered from steeper losses in earlier trade, when it appeared on the verge of closing out below its long-term 200-day moving average for the first time in about 20 months. 

The Russell 1000 Growth index RLG, -0.09% was down 1.2% Monday afternoon, steepening its drop this year to about 6%, according to FactSet data, at last check. The Russell 1000 Value index RLV, -0.17% was faring better in Monday’s slump, trading about 0.7% lower but clinging on to a 0.1% gain for the year.

Market volatility has been back on the rise this year, with the Cboe Volatility Index VIX, +3.41% trading around 21 on Monday afternoon, FactSet data show.

Investors also have worried that the rapidly spreading omicron variant of the coronavirus could hurt economic growth as it has led to a surge in COVID-19 cases.

Read: COVID-19 cases are still rising, and hospitalizations in the U.S. may soon hit a record high

But markets can also handle omicron, according to the J.P. Morgan report.

“We stay positive on equities and expect omicron will ultimately prove a positive for risk assets, as this milder but more transmissible variant speeds the transition from pandemic to endemic with a lower human toll,” the J.P. Morgan analysts wrote.

“As this wave fades, it will likely mark the end of the pandemic,” they predicted, while also saying, “as omicron’s lower severity and high transmissibility crowds out more severe variants and leads to broad natural immunity.”

For the near term, the J.P. Morgan research analysts said “we recommend buying the dip on US indices given oversold conditions.”   

The S&P 500 SPX, -0.14% and Dow Jones Industrial Average DJIA, -0.45% were also trading down Monday afternoon, as the U.S. stock market extended last week’s declines.

Over the medium term, the J.P. Morgan strategists favor emerging markets, China and Europe  “on improving activity and easing headwinds, and the UK on valuation,” according to the J.P. Morgan report. The Eurozone’s 2022 real GDP forecast of 4.6% stands above the U.S. for the first time since 2016, the analysts wrote.

The strategists also cited “signs of supply constraints potentially passing their worst point” and took an optimistic view of corporate earnings. Consensus projections will probably prove too low, they said, pointing to “further upside for stocks.”

“We stay bullish,” the analysts wrote. “Positive catalysts are not exhausted.”

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