Although global stock markets fell amid soaring bond yields and energy prices, JPMorgan Chase & CoStrategists led by Marko Kolanovic, co-head of global research, offer reassuring predictions that markets and economies can afford much higher Treasury yields and oil prices.
West Texas Intermediate futures have broken through $75 a barrel, the highest since 2014. But strategists point out that in the recent history from 2010 to 2015, the US economy and consumers have performed well with the average price of WTI crude oil reaching $100. In fact, their model suggests that oil prices could rise to $130 or $150 without too much trouble, adjusted for factors such as inflation and consumer purchasing power.
At the same time, they say concerns about rising yields are overdone. Given the profitability of US companies and the valuation premium of stocks over bonds, US stocks can absorb even if the yield on the 10-year Treasury note reaches 2.5 per cent-about 100 basis points higher than the current level.
"unless US 10-year yields rise above 250bp to 300bp, we do not expect the stock market to fall widely and we do not expect yields to rise so much in the short term," Kolanovic and colleagues wrote in a note to clients on Wednesday. "We don't think current energy prices will have a significant negative impact on the economy."
Kolanovic, who has been one of the strongest bulls in the stock market, advises investors to buy risky assets as the economy continues to recover from the epidemic. This optimism stands out amid warnings from Wall Street.
"We think this is the last wave and an effective end to COVID-19 's epidemic," he wrote, reiterating that he preferred economically sensitive stocks to technology and growth stocks with high valuations.