Investors should buy the dip in stocks as markets can withstand higher interest rates, JPMorgan's quant guru says

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Stocks have risen sharply over the last year, helping the Dow Jones finally break the 36,000 barrier.

  • Investors should buy the dip in US stocks, according to JPMorgan quant-guru Marko Kolanovic.
  • He believes the market will be able to absorb the rise in interest rates, but favors value over growth stocks.
  • “The pullback in risk assets in reaction to the Fed minutes is arguably overdone,” Kolanovic said.
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The ongoing decline in the stock market represents a buying opportunity for investors, according to a Monday note from JPMorgan quant-guru Marko Kolanovic.

Investors jumped into risk-off mode last week after minutes from the Federal Reserve’s December meeting showed a hawkish pivot towards interest rate hikes and a reduction in its balance sheet. The signal of a tightening Fed helped contribute to an ongoing meltdown in cryptocurrencies and speculative high growth stocks.

But Kolanovic believes the stock market will do just fine amid rising interest rates, and that the pace of Fed hikes will likely “be gradual and at a pace that risk assets should be able to handle, and is occurring in an environment of strong cyclical recovery,” according to the note.

“Higher bond yields should not be disruptive for equities, but rather support our call for a growth to value rotation,” he said, before recommending investors buy the dip in US stocks.

Kolanovic also believes that the Omicron variant of the coronavirus “will ultimately prove a positive for risk assets, as this milder but more transmissible strain speeds the transition from pandemic to endemic with a lower human toll.”

Daily cases of Omicron have surged to records in recent weeks, but hospitalizations remain below prior peaks, backing up the idea that Omicron is less deadly than other variants.

Kolanovic expects the ongoing surge in Omicron cases to present downside risks to first-quarter growth, but a sharp roll-over in cases in the coming weeks could help boost second-quarter growth, according to the note. 

“As this wave fades, it will likely mark the end of the pandemic, as Omicron’s lower severity and high transmissibility crowds out more severe variants and leads to broad natural immunity,” he concluded.