The recent resurgence in meme stocks signals troubling undercurrents in the stock market, as highlighted by JPMorgan's chief global markets strategist, Marko Kolanovic.
As the S&P 500 hovers near record highs, Kolanovic maintains a cautious stance with one of Wall Street's lowest S&P 500 targets at 4,200, suggesting a potential 20% drop.
Kolanovic expresses skepticism about the current high valuations in the face of historical and statistical norms. He notes the S&P 500's forward price-to-earnings ratio stands at 21x, well above the 30-year average of 17x. This is particularly concerning given the sustained high interest rates, which traditionally dampen market valuations.
The mix of elevated market valuations, the revival of speculative trading in cryptocurrencies and meme stocks, alongside unsettling economic indicators, solidifies his bearish outlook that has persisted for nearly two years.
Kolanovic points out the disconnect between investor indifference to high asset valuations and the reality of economic signals indicating potential downturns. Recent increases in meme stock and cryptocurrency trading, high valuations in tech sectors, and the divergent performances between stocks and bonds are particularly alarming.
From an economic perspective, recent data, including the Chicago PMI's fall to a four-year low and rising unemployment rates from 3.4% to 3.9% over the past year, suggest a looming economic slowdown or recession. Other concerning indicators include a persistent yield curve inversion for nearly two years, a sharp decline in home sales, and rising consumer delinquencies.
The revival of meme stocks like GameStop and AMC Entertainment, with significant price volatility over the past month, mirrors the speculative frenzy seen in early 2021. This pattern, where speculative trading precedes broader market challenges, underscores the potential risks to the overall market stability.
Despite these speculative activities, FINRA margin debt, a key measure of market leverage, has not yet surpassed its peak of $935 billion reached in February 2021. This metric will be crucial in gauging the speculative temperature and potential market adjustments moving forward.
