• Firm’s quant guru says U.S.-China relations haven’t worsened
  • Brushed aside concern of shutdown in case of second virus wave

Marko Kolanovic, who two weeks ago tempered his bullish stance on stocks because of worsening geopolitical tensions, says now is the time to move back in.

A drop such as Thursday’s should be bought, according to JPMorgan Chase & Co.’s quant guru. His reasoning is that it occurred in the absence of a further deterioration in U.S.-China relations. Kolanovic considers the three principal risks to U.S. stocks to be that relationship, the Covid-19 pandemic and domestic social unrest.

A potential source of equity demand may be hedge funds, which have generally refrained from joining the equity rally, Kolanovic predicts. Trend-following traders are likely to start raising equity exposure this summer, with volatility sitting at current levels, based on the firm’s model. Then stock pickers will follow, buying the dips “opportunistically,” he says.

“With the recent market pullback, we are again more comfortable with taking a positive view,” Kolanovic wrote in a note to clients. “Positioning in equities did not increase significantly and China risks appear to be abating.”

Stocks rose Friday as the S&P 500 recovered some of Thursday’s 5.9% drop, which was the worst since March. Equities sold off earlier this week with signs of a second wave of coronavirus infections emerging in some states. Kolanovic brushed aside the threat of a second wave in terms of a need for broad economic shutdowns, calling it “unlikely” given the knowledge about the virus already obtained during the outbreak.

Kolanovic urged investors to buy the dip in early March amid the fastest bear-market decline on record. While that call came a bit before that month’s trough, he has maintained his bullish stance since, saying last month that the S&P 500 can reclaim its all-time high in the first half of 2021.

In the latest update, he reiterated his preference for value stocks, those trading at a cheap multiple relative to earnings or book value. The investment style, dominated by cyclical shares such as banks, will continue to benefit from an economic reopening, he said. The Russell 1000 Value Index dropped 7% over five days for its first decline in four weeks.

To contact the reporter on this story:
Lu Wang in New York at [email protected]

To contact the editors responsible for this story:
Courtney Dentch at [email protected]