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- JPMorgan is overweight commodities outside of gold, given weak positions and geopolitical risk.
- Concerns with US Treasury supply have not been resolved by recent developments, it said.
- Meanwhile, investors are too optimistic equities can run higher, amid a slew of headwinds.
JPMorgan recommended commodities over government bonds, and reiterated a cautionary stance on the ongoing stock market rally.
In a Monday note, chief global markets strategist Marko Kolanovic said the bank is still positioned for defense, despite recent investor optimism.
"This month, we take profit on our long duration exposure in government bonds given their strong rally, increasing supply, dovish Fed pricing and increased investor positioning," he wrote. "We use the cut in bond allocation to fund an increase in our commodity allocation given still high geopolitical risk, and the significant sell-off and weaker positioning in energy, and we incrementally shift our within-commodity allocation into energy."
Though he acknowledged that assets such as oil have taken a hit in the past month, with Brent crude sliding over 12% since late September, investors have become too underweight on commodities outside of gold.
That's based on a comparison of open interest of commodity futures ex gold, which indicates that allocation in the asset class has plenty of room to run up.
Meanwhile, oil's lowered pricing also makes it a reliable geopolitical hedge, as Middle Eastern turmoil continues to remain elevated. In this case, JPMorgan's preference for energy assets outweighs that of gold, which appears set for an overcorrection lower.
Against this, the bank has become underweight in bonds this month, on concern that long-duration yields may still be in the process of peaking out.
While some relief came from the Treasury Department's recent decision to slow down bond issuance, as well as the Federal Reserve's latest interest rate pause, the oversupply of Treasurys is only a worsening problem, Kolanovic wrote.
Meanwhile, investors shouldn't lean on equities, as current optimism in the stock market is detached from a slew of mounting headwinds, Kolanovic said.
"In equities, we retain a defensive stance and are unwilling to chase the past two weeks' rally. Our defensive stance hinges on our expectation that a recession will take place next year," he wrote.
Specifically, higher-for-longer monetary policy and expensive equity values may come to challenge the ongoing rally, he wrote. Consumers are also likely to pull back spending, given depleted savings and a tighter credit environment.
"This is likely to drive demand destruction, and weakening pricing power and margins for corporates in the coming quarters, and suggests that consensus expectations that look for 12% EPS growth next year appear overly optimistic," Kolanovic added.