J.P. Morgan is telling its clients to ignore worries over a potential trade war, predicting the market will rise to new highs.
"The most recent bear narrative is trade wars (and particularly one with China). We argue below that this risk is also very low, and if we take the 2015 turmoil as a template for flows from systematic and fundamental investors, markets are likely to reach all-time highs soon," quantitative and derivative strategist Marko Kolanovic wrote in a note to clients Thursday.
Kolanovic said recent concerns over inflation have been "debunked" by recent economic data and the stability of the 10-year bond yield at around 2.8 percent. He downplayed the risk of a trade war due to an analysis of President Trump administration's incentives into the mid-term elections later this year.
"Let's note that there is a large asymmetry of the outcome rewards by participants. A significant trade war started by this administration would destabilize global equity markets," he wrote. "Should this happen ahead of the November election, it would impair the administration's 'market scorecard' and likely lead to an election loss. Lost elections open a path to impeachment, and other complications."
Instead the strategist said the market will likely follow what happened after the August 2015 sell-off.
"The flow aspect of the sell-off had a striking similarity with the August 2015 sell-off: realized volatility caused derisking from volatility targeting strategies and forced covering of short volatility positions," he wrote. "Unless there is a recession, all of these flows tend to reverse within 1-2 months."
Some traders cited the circulation of Kolanovic's note on trading floors as a reason why stocks rolled over during a trading session in July last year. He is regarded as an expert in volatility and derivatives.