JPMorgan's Kolanovic says it's hard to find any bubbles in the stock market

Published Wed, Feb 24 202110:39 AM EST

JPMorgan's quant guru Marko Kolanovic believes there's no need to worry too much about bubbles in the stock market, despite all the recent chatter. He does see a bubble in one particular market derivative, however. "While there is a lot of talk about bubbles – it is hard to see one in the broad equity market, where a dominant group (FANGs) practically hasn't moved for 6 months despite massive amount of stimulus and an expected economic recovery," Kolanovic, JPMorgan's global head of macro quantitative and derivatives strategy, said in a note on Wednesday. The so-called FANG block — Facebook , Amazon, Netflix and Google's parent Alphabet — rallied aggressively in the months following the market bottom in March as investors embraced their megacap safety as well as their insulate internet business during the pandemic. However, their massive rally seems to have stalled amid a big rotation out of high flyers and into stocks more linked to an economic comeback, such as energy and financials. Their recent weakness put pressure on the broader market due to their heavy weightings in the equity benchmarks. The S & P 500 snapped a two-week winning streak last week and is down another 0.7% week to date. "The current market turmoil is a result of pro-risk sector and style rotations, away from speculative growth and bond proxies, and inflows into value and cyclicals," Kolanovic said. The strategist, who nailed the market's pandemic bottom and its subsequent comeback, remained bullish on stocks on the back of the economic reopening and unprecedented amount of stimulus injected into the economy. "Our view on risky assets is constructive based on the strong fundamentals that underpin this market (see here) – global COVID-19 recovery and reopening of economies, as well as monetary and fiscal stimulus, and net equity positioning that is still low," Kolanovic said. Still, Kolanovic did acknowledge some overvalued pockets of the market, including the red-hot clean energy space. The iShares Global Clean Energy ETF (ICLN) advanced 140% in 2020 and is down about 7% year to date. "We did identify some relatively contained market segments that appear to be in a bubble related to EV, renewable energy and innovations stocks," Kolanovic said. VIX in a bubble? Kolanovic believes Wall Street's fear gauge the Cboe Volatility Index , which stubbornly remained elevated despite the market's record highs, is in bubble territory. "If we want to be thorough in our search for bubbles, there is another asset that is currently in a bubble – the VIX," Kolanovic said. "The VIX is now disconnected to underlying short term S & P 500 realized volatility, indicating a bubble of fear and demand from investors looking to hedge or profit from a hypothetical market selloff." Amid the market's pullback over the past two weeks, the VIX climbed above 20 again after briefly breaking below the key threshold earlier this month. The gauge traded around 25 on Wednesday as the market came under pressure again. The VIX derives its value from the prices on put options and call options on the S & P 500. When it is rising, it is believed to mean investor fear is rising. However, Kolanovic believes the VIX is poised to decline from here as stocks resume its rally amid a favorable backdrop. "Positive macro fundamentals of monetary and fiscal stimulus, as well as recovery from pandemic" will drive the VIX lower, while a "strong rotation from growth to value/cyclicals that is keeping correlation between stocks low," Kolanovic said.

Wall Street Bull statue in New York's Financial District.

Erik McGregor | LightRocket | Getty Images

JPMorgan's quant guru Marko Kolanovic believes there's no need to worry too much about bubbles in the stock market, despite all the recent chatter.

He does see a bubble in one particular market derivative, however.