×

JP Morgan: 'Goldilocks' stock conditions ahead after Fed decision

  • "This outcome is a positive and indicates that equity investors could expect a near-term goldilocks environment," writes J.P. Morgan's Marko Kolanovic.
  • Kolanovic says the central bank quelled overblown inflation concerns by leaving its so-called dot plot unchanged for 2018.

J.P. Morgan told clients that the Federal Reserve's reluctance to forecast four rate hikes in 2018 should spur a "goldilocks" rally in stocks.

"There was no significant change in inflation expectations and the growth outlook, alleviating recent equity markets concerns," quantitative strategist Marko Kolanovic wrote Wednesday. "This outcome is a positive and indicates that equity investors could expect a near-term goldilocks environment."

Goldilocks and the three bears
Antonbrand | Getty Images
Goldilocks and the three bears

Kolanovic said the central bank quelled overblown inflation concerns by leaving its so-called dot plot unchanged for 2018. The dot plot chart, which maps anonymous entries from each Fed official on the course of interest rate hikes, likely signals that the central bank expects prices to grow steadily and not accelerate beyond a comfortable pace.

The Fed's latest move in monetary policy, however, appears to have left markets "confused."

The Dow Jones industrial average hit session highs immediately following the release but reversed course multiple times as ChairmanJerome Powell took questions, ultimately ending the day lower. Bond yields, too, couldn't seem to make up their mind, with the rate on the 10-year Treasury note climbing to highs above 2.93 percent before ending the day unchanged.

But Kolanovic's bullish view on equities is nothing new. The J.P. Morgan strategist wrote to clients earlier in the month to assure them that worries over a potential trade war would prove unfounded.

"The most recent bear narrative is trade wars. 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," Kolanovic wrote last Thursday.

In fact, Kolanovic told CNBC's "Fast Money" on Thursday that any movement in the market caused by trade war fears is minimal, likely a single digit basis point at best.

"There are a lot of fear stories," Kolanovic said, including Fed rate hikes and the Facebook scandal that caused market watchers to panic.

"Some come and go, and a new one comes, and clearly sentiment is bad," he said.

Still, Kolanovic said even if there is a trade war, he does not think it will have adverse effects, such as destabilizing the economy.

"It's a bit of noise that will pass," he said.

Despite the optimistic calls from J.P. Morgan, the market took a nosedive Thursday. The Dow Jones industrial average fell 724.42 points, closing at 23,957.89 — a 2.9 percent decline. The S&P 500 was also down 2.5 percent to 2,643.69. And the Nasdaq Composite declined 2.3 percent to close at 7,166.68.

"It was an ugly day. It was a disappointing day," said Kolanovic, who said he was expecting the market to go up after the Fed's announcement on Wednesday. "We saw it as a positive for equities."

But while the analyst said Thursday's mass sell-offs were "certainly not a positive development," he maintained that fundamentals and global growth are still strong and he expects the market to recover with a positive earnings season this April.

Accelerated sell-offs at the close of Thursday's trading session were "entirely technical," he said.

"We maintain our positive near-term view on U.S. equities," Kolanovic reiterated in the note. "The path of recovery is likely to mimic the August 2015 selloff that was also driven by systematic selling, as market volatility subsides, continuation of strong buyback demand, and focus shifting to a strong upcoming earnings season."