2020 Outlook JPM

Excerpts from JPM Equity Strategist Kolanovic 2020 outlook via Heisenberg report

So, what about 2020? Well, he’s glad you asked. “While investors increased equity positioning over the past month (in the aftermath of phase 1 trade progress), our assessment is that investors have net exposure that is close to historical averages”, he says, adding that “positioning is higher for systematic funds (e.g., volatility sensitive strategies and CTAs in ~75th percentile), but lower for discretionary and fundamental managers (e.g., discretionary funds ~40th percentile)”.

Next year, he expects outflows from bonds and inflows into equity funds, supporting stocks alongside the relatively benign macro outlook and assumed room for more re-leveraging from the fundamental/discretionary crowd.

Taking that into account, Kolanovic says “equities can still move higher, and we are setting our S&P 500 2020 price target at 3,400… based on our EPS forecast of 180 and multiple of ~19x”.

For 2020, Marko largely reiterates that view, noting that the bank’s fair value model calls for a 15 VIX, but adding that between “incremental central bank support, our positive view on PMIs and trade war developments, we would lower that target by ~0.5 to 1 point relative to 2019”. Here’s a bit more:

Similar to our 2019 forecast, we think the median VIX will be realized with the most prevalent reading of ~12 and likely one or two bouts of volatility into a 15-25 range. As such, we think that the outlook for short volatility strategies is only marginally better than last year.

As for the risks to the outlook, it’s pretty simple, really. The risks center around US trade policies, namely, whether there’s another escalation that “injects volatility into financial markets”. Such an escalation, Kolanovic warns, could “prevent a PMI recovery and could even cause a recession”.

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