- John Normand, JPMorgan’s head of cross-asset fundamental strategy, is putting six big developments in perspective as positive or negative developments for markets. He’s also ranking their significance.
- Normand explains how he’s positioned as a flood of news plays on investors’ anxieties at the start of 2020.
- The strategist says he’s not making big overall changes, but details some adjustments that could help investors endure the market’s latest gyrations.
- Click here for more BI Prime stories.
Almost every Wall Street expert is predicting more volatility this year than last. But even with that in mind, the first week of 2020 has been a dramatic one.
All of a sudden it seems like there’s more news than anyone knows what to do with. How should traders be putting it in perspective?
John Normand, head of cross-asset fundamental strategy for JPMorgan, decided to rank the six biggest issues facing the market between now and the end of the first quarter. And while he’s not changing his overall forecasts for now, he’s explaining how these developments fit into his current approach.
“Markets enter 2020 more hesitantly than they ended 2019 given mediocre activity data and mixed policy developments in the monetary and geopolitical spheres,” he wrote in a note to clients.
Here are Normand’s six critical developments for the stock market, ranked in ascending order of importance, from least significant to most.
That’s right, impeachment rates as the sixth-most important issue of the next three months. Even with little chance Donald Trump is removed as president, Normand says impeachment could still be significant for the market in other ways.
“The greater wildcard has always been how the process would impact Trump’s approval rating, voting intentions for the Democratic Presidential nomination and the election odds in key Senate races,” he said.
Right now that isn’t happening. But election years are associated with market volatility, especially in their early months, and Normand says more of that lies ahead.
“The election season should provide numerous catalysts – for better or worse – throughout the year, but neither the Senate trial nor the campaigns should until February or March,” he wrote.
(5) Brexit developments
Normand says the odds of Britain crashing out of the European Union without a deal are a bit higher than he thought.
“The possibility of a hard Brexit in 12 months’ time still seems high – our economists place the probability at 25%,” he wrote, after Parliament approved a bill that says the government can’t agree to a deal that would extend a Brexit transition period past this year.
How to trade it:
In this case, Normand advises investors how not to play this scenario. “Typical relief trades like owning sterling, shorting gilts vs Bunds or Treasuries or overweighting UK domestic equities do not offer good risk-reward entering 2020.”
(4) Trade deal details
Details of the “phase one” US-China trade agreement are trickling out. Normand says the fine points are relatively minor, and what really matters is whether the deal encourages companies to spend more money and contributes to quicker economic growth.
“We were and remain open-minded about how this issue will impact corporate sentiment and eventually capex,” he said. “Watch JPM’s Manufacturing Expectations Index (MEI) for intra-month updates as the business sentiment components of various countries’ monthly surveys are released.”
(3) New easing in China
It’s a small positive that China’s central bank lowered the required reserve ratio for big banks, Normand explains, because that’s the latest sign of government support for the national economy.
“A more positive hue might come from a recognition that policymakers might not tolerate a growth shortfall below 6%,” he wrote.
How to trade it:
Normand isn’t telling investors to adjust their positioning based on the latest round of easing, but he remains overweight on emerging markets stocks and calls China, Brazil, and South Korea his highest conviction picks. Other areas of high confidence include EM corporate bonds and currencies.
(2) Wobbly manufacturing
In the final months of 2019, investors saw signs that global manufacturing was starting to pull out of its downturn. That’s one reason the market was so cheery at the end of 2019. But that recovery may have gone off the rails a bit last month.
That’s an obvious negative for markets, but Normand says it’s worth remembering that minor hiccups are common during periods of economic recovery.
“In general, every reflationary episode of the past 20 years has involved at least one monthly pullback in the PMIs within the first year,” he said.
For that reason, he thinks it’s likely the recovery in cyclical assets will continue. Using this chart, he shows that the recent rally in those areas is a solid one and compares favorably to other recoveries in the past.
How to trade it:
Normand remains broadly positive on industrials, along with communications, energy, and healthcare stocks. Those views aren’t specific to this development, however.
(1) The Middle East
Using this chart, Normand fixes numbers on the relationship and shows that when supplies drop or demand grows by 500,000 barrels, prices rise about 12%, and vice versa.
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Normand writes that the increase in prices is a minor positive for energy companies, and a modest negative for companies that are most closely linked to the economic cycle. While supplies are tighter than they were a few months ago, he’s skeptical of the idea that prices could spike high enough to derail global economic growth.
How to trade it:
“If spike risk persists but might be contained, portfolio strategy should focus on energy exposure that doesn’t strictly require higher prices to outperform, such as a combination of value trades (overweight US & European Energy Equities) and carry trades (US HY Energy Credit, RUB vs USD),” he said.
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