J.P. Morgan says a continuation of the surge in oil prices would likely not damage the economy or financial markets.
Oil prices recently have soared, hitting a seven-year high on Tuesday, as supply shrinks while demand grows.
U.S. crude recently traded at $78.45, up 1%, and has jumped 62% year to date.
“We do not believe that the current price of energy will have a significant negative impact on the economy,” said Marko Kolanovic, chief global market strategist for JPMorgan.
“For instance, the economy and consumer were functioning just fine in the period over 2010-15, when oil averaged above $100.“
Further, “Adjusting for inflation, consumer balance sheets, total oil expenditures, wages and prices of other assets (housing, stocks, etc.), we think even with oil at $130 or $150, equity markets and the economy could function well (with some rebalancing and capital rotations),” Kolanovic said.
“In fact, all of the major asset classes (bonds, stocks, real estate, etc.) have increased about 50% or more, while oil has declined 25% over the last decade. Oil is by all cross-asset comparisons cheap today.”
Meanwhile, Kolanovic says Covid will continue to wane, boosting cyclical assets.
“We believe the recent pullback is an opportunity to buy the dip in cyclical assets, which would include all equities (emerging and developed markets), apart from high-multiple growth sectors,” he said.
That’s because of “intensifying energy issues, rising inflation and bond yields, still extreme overweights in growth and tech stocks, and underweights in value and cyclical stocks.”
JPMorgan’s “highest conviction” sector ideas remain energy, materials, industrials, financials, and reopening, Covid-recovery, reflation and consumer themes.