(Bloomberg) -- A strong earnings season should bolster the rattled U.S. stock market, but potentially not without some further turmoil, according to JPMorgan Chase & Co (NYSE:JPM).’s head of quantitative and derivative strategy, Marko Kolanovic.
“Liquidity was a big problem in the market meltdown of early February, and hasn’t really recovered since then,” Kolanovic said in a March 29 interview in New York, referring to the worst selloff in the S&P 500 Index since August 2015. Buyers’ strikes could continue to plague the market as investors grapple with worries ranging from a global trade war to pressures on Facebook Inc (NASDAQ:FB)., he said.
“A lot of these concerns are likely overblown -- it’s reflective of the psychology of fear driven by market volatility,” he said. “The only real problem now is low liquidity and market volatility,” he said. And liquidity should improve when the Cboe Volatility Index falls, he said.
The problem is that it isn’t, for now: the gauge surged 3.65 points on Monday, when the S&P 500 fell 2.2 percent. At issue is the willingness of selloff-scarred buyers to step into a market in times of doubt, according to Kolanovic, who’s earned his reputation by forecasting dramatic ups and downs in markets.
The structure of today’s market makes it more susceptible to sharper swings, he said:
- A host of systematic strategies have the capacity to exacerbate moves by reinforcing price trends. As volatility increases, selling from such strategies tends to result in one-way flows in index products such as futures and ETFs.
- Those declines in turn cause market liquidity to dry up
- There are fewer traditional players willing and able to step in to slow one-way moves. Value investors, for instance, have been hurt by more than a decade of underperformance, and may have less capacity to mitigate a selloff.
Kolanovic isn’t the only one warning about liquidity. Societe Generale (PA:SOGN) strategists led by Kokou Agbo-Bloua wrote in a note on March 30 that investors should be wary of the possibility for late-cycle volatility bursts fueled by distortions in liquidity.
But conditions aren’t yet in place to fuel a broader bear market, and bets on the big downturn may be premature, according to Kolanovic.
“Investors should just stick to facts and fundamentals," he said. "Earnings should alleviate many of the fears.”