New York: The stock market may be bound in a range by US President Donald Trump, according to JPMorgan Chase & Co.’s Marko Kolanovic.
There’s a “Trump collar” on markets as the president reassures traders when equities are down, but does things that worry investors when they’re doing well, said JPMorgan’s global head of macro quantitative and derivatives research. Kolanovic’s positive on aspects such as the Federal Reserve’s effects, the US and Chinese economies and investor positioning. His firm has a year-end forecast of 3,000 for the S&P 500, or about 6 per cent above current levels.
Kolanovic last week said that a “Trump put,” with the president trying to soothe investors, would be at a 3 per cent-4 per cent sell-off. On May 24, he and colleague Bram Kaplan said in a note that pension funds could provide a tailwind to stocks at the end of the month as they rebalance after an unusually large underperformance versus bonds so far in May.
“We still think the second half of the year’s fundamentals will be better than the first half,” he said in an interview in New York. “We are still broadly positive because trade-war escalation is irrational and it’s in everyone’s interest for this to get resolved. The trade war is not a positive for the US, the world, consumers or markets — and ultimately for Trump.”
Recent developments in US-China negotiations were negative, but positioning provided some cushioning at least initially in sell-offs, according to Kolanovic. Investors aren’t terribly long stocks, so there wouldn’t be as much to sell, and leverage is not very high, he said.
Yet fatigue may set in at some point, according to Kolanovic.
“Eventually investors may give up because they are not going to be guessing the tweets,” he said. “People cannot really enthusiastically invest” with such uncertainty in the backdrop.
Kolanovic recommends adding to some of the currently “very distressed” segments in semiconductors, energy, metals and mining stocks — some of which are close to their lows. Even those who aren’t positive on the broader market could go long on the cyclical assets that are well off their peaks, while shorting defensive assets that are way above previous highs for a relative-value view, he said.
A Performance Gap
Kolanovic has also pointed out to the importance of factors such as a big gap between defensive and cyclical factors as well as quality and low-volatility reaching all-time highs. He also highlighted the fact that value and high beta are at all-time lows.
“We think it will snap back very violently, and we see it as an opportunity,” Kolanovic said, though he cautioned it could hurt hedge funds.
Market fragility is also still on the radar for the strategist, who noted that since January 2018, there have been two record highs and two all-time lows in stock correlations.
Read more about Kolanovic’s concerns about fragility in the marketplace.
“The market is behaving irrationally under the hood,” Kolanovic said, and “it’s partially quant flows, partially liquidity, and partially macro developments.”
Swings in correlation and flash crashes are related to market fragility — namely, the feedback loop between volatility, flows and liquidity. One area for hope on that front: Kolanovic said there’s potential that machine-learning algos might learn to recognise if they’re causing or exacerbating a flash crash, and pull back.
“With reinforced learning you study your actions in real time. If an algo is causing damage to the market, at that moment, it could take a step back,” Kolanovic said. “But if you have to sell a certain amount, there may be no way to avoid the impact.”