Even JPMorgan’s bullish strategist Kolanovic says markets are getting ahead of themselves. Here’s what he and a Goldman strategist say to do now.

A not-so-terrible day is getting underway as the clock ticks down to Wednesday’s retail sales report.

But while some investors are clinging to hope that last week’s stock market run can continue, fueled by that softer inflation report, Wall Street remains cautious, and fresh warnings from two major banks that we call of the day.

Late Monday, Goldman Sachs warned clients that easing bonds and risky assets was “likely overdone.” Almost simultaneously, one of Wall Street’s most vocal bulls — JPMorgan’s Marco Kolanovic — cut his equity risk exposure for the second time in two months, and he also called that big push back in the market last week.

First up is Kolanovic, who has been a known bull for much of this year.

With a fed funds rate close to 5%, a recession will be difficult to avoid unless the Fed tightens more significantly. As such, our optimism is tempered by the still elevated recession risks, and the risk that the October CPI data appear erratic and/or fail to reduce central bankers’ eagerness to push policy into more restrictive territory,” Kolanovic said.

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Taking advantage of last week’s rally, JPMorgan plans to reduce its equity overweight “moderately.” Other movements? Abandon a long-dollar bias, and add exposure to corporate bonds with a focus on high yields; reversing a previous overweight in US versus European high-grade credit, due to the latter’s greater risk premium; and shift to neutral from underweight on emerging market sovereign debt.

Kolanovic says they also remain overweight on commodities, caught up in the easing of COVID restrictions in China and hedging both inflation and geopolitical risk.

The strategist called the summer rally for stocks, saying as far back as September that stocks could rely on “robust earnings, low investor positioning and well-anchored long-term inflation expectations” even if the Fed was hawkish. He first cut equity exposure in October, growing uneasy about the Fed’s dovish tone and geopolitics.

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As for Goldman Sachs, which has been much more cautious this fall, a team led by strategist Cecilia Mariotti noted how that stock run last week was focused on “some of the market’s shortest and longest-duration pockets.” That is, the Nasdaq and Goldman’s not-for-profit technology basket, which have also been among the worst performers year to date, she said.

Consistent with a negative correlation seen with bond yields this year, the recent stock bump “likely reflects the markets’ hope for a real spike in inflation and falsity, which will tend to support risky assets provided growth remains strong, ” she said.

And while sharp bear market rallies are not uncommon, the bank believes “bearish positioning exacerbated some of the moves.” In fact, temporary reprieve in some sentiment indicators, such as surveys coming off bearish levels, can drive big stock reversals, she said.

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That’s because consumers themselves are becoming cautious, Mariotti said, citing the recent University of Michigan consumer sentiment survey.

The strategist said investors should understand that the risks of a “hike cycle extension” still exist and if markets see a major easing in financial conditions, it could only force central banks to repeat a hawkish stance, especially in the case of resilient growth.

Goldman’s advice? Avoid the tech stocks that still look expensive and look to China, which is backed by reopening hopes.

Read: The Dow is outperforming, which could be a sign that the latest stock market rally will fizzle out

The markets

MarketWatch

Stock Futures ES00,
+0.75%

YM00,
+0.48%

NQ00,
+1.14%
is higher than the dollar’s DXY,
-0.47%
post-CPI decline continues, with Treasury yields TMUBMUSD10Y,
3.812%

TU00,
+0.08%
also softer. Cooling tensions between China and the US are also helping to lift the mood. Oil prices CL.1,
-0.76%
is a touch lower. The International Energy Agency has predicted higher demand for this year and next. Elsewhere, gold GC00,
+0.07%
is on and bitcoin BTCUSD,
+2.58%
firmer at $16,802.

The buzzing

Home Depot HD,
-2.55%
shares are lower after the DIY retailer left its outlook unchanged. Walmart WMT,
-2.94%
results are yet to come.

China’s economic activity showed signs of slowing in October, but stronger online sales lifted Alibaba BABA,
+0.79%
and other technology names in Hong Kong, with related ADR listings climbing in premarket trading.

Producer prices and the Empire State manufacturing index are due at 8:30 a.m., while Fed. Gov. Lisa Cook and Philadelphia Fed Pres. Patrick Harker will make morning appearances, with Fed Vice Chairman Michael Barr testifying before the Senate Banking Committee on regulation. Third quarter household and mortgage debt is due at 11:00

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The chart

Expectations for a recession are the highest since April 2020, around the height of the COVID pandemic. That’s according to Bank of America’s Global Fund Manager Survey, released Tuesday, which shows a net 77% of managers see the economic pullback coming in the next year.

BofA

The tickers

These were the top searched tickers on MarketWatch as of 6am

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