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The US is more likely to end the trade war than face a ‘Trump recession,’ JP Morgan’s top quant says


Marko Kolanovic

Crystal Mercedes | CNBC

J.P. Morgan’s head quant said Wednesday that a U.S.-China trade deal could head off a “Trump recession” and ignite a powerful rally in value and high beta stocks.

Marko Kolanovic, global head of quantitative and derivatives strategy, said in a note that he is “cautiously positive” on stocks, but his view carries risk because it depends on progress being made in the trade war.

The trade war has so far offset all benefits of fiscal stimulus and could lead to a global recession if it continues. That recession would be called the “Trump recession” because it would have been mainly caused by the trade policies of President Donald Trump’s administration, he noted.

If the trade battle were to end, Kolanovic expects there would be a swift rally in the stock market.

“This would translate into a quick ~5% rally in broad markets, and a 10-20% rally in value and high beta. As a strong market and avoiding a recession would boost re-election odds, it would only be rational to expect this outcome,” wrote the analyst.

“The impact of the trade war was particularly negative on segments that were its intended beneficiaries — such as manufacturing (autos, electrical equipment, etc.), smaller domestic companies, steel industry, etc,” he noted. For instance, U.S. Steel has fallen 75% since the start of the trade war.

But segments that might not do well include defensive and low-volatility segments, like low-beta stocks, utilities, REITs and staples. Those sectors are “very expensive and might be poised to underperform in both positive and negative trade scenarios.”

Kolanovic said market sentiment has become “fragile,” as discretionary investors reduced their stock market exposure over the past few weeks, and net exposure, or “equity beta” of hedge funds is very low.

Yet, Kolanovic said he is not negative on stocks or the economy because the trade war could be ended on short notice, and many market segments are already pricing in a worst case scenario.

In the past two years, he said the stock market could be divided into two phases—one a period where it rose in anticipation of fiscal reform that lifted corporate earnings and the economy, and the second “a value-destroying trade war.”

“Before the trade war, equities were rising at an above-trend pace, and then stayed unchanged for ~18 months. If one takes the average annual return of US equities was ~7% (current capitalization of $30T), the estimated cost of the trade war so far is about ~$3T,” he wrote. “The market damage is ~100 times the tariffs collected so it is clearly not making the country richer.”

CNBC’s Michael Bloom contributed to this story.


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