JP Morgan strategist who called March market comeback sees a big year ahead for stocks

Published Wed, Dec 9 20202:07 PM ESTUpdated Wed, Dec 9 20202:12 PM EST

J.P. Morgan Chase strategist Marko Kolanovic expects the stock market surge to continue through 2021 as the coronavirus recovery intensifies and volatility subsides. As markets were falling apart in mid-March, Kolanovic called a recovery that has seen the S & P 500 post a 14% gain in 2020 after a breakneck dive into bear market territory at the pandemic's outset. In his look ahead to next year, J.P. Morgan's global head of macro quantitative and derivatives research, expects a confluence of factors to bring another strong year. "Our outlook for 2021 is positive for equities and more broadly for risky assets," Kolanovic said in a report for clients. "We expect markets to be driven by recovery from the COVID-19 crisis at the back of highly effective vaccines and continued extraordinary monetary and fiscal support." His S & P 500 target for 2021 is 4,400, which implies an 18.8% gain from Wednesday's opening price. At the heart of the forecast is an expectation that the low interest rate climate will push institutional investors like pensions and sovereign wealth funds out of bonds and into higher-yielding assets like stocks. From an investment perspective, he sees a rotation from growth and momentum, the two major drivers of the 2020 stock rally, into value and cyclical stocks. Financials and energy, the two worst sectors on the S & P 500 this year with respective declines of 7% and 34%, are forecast to outperform. "This would be an environment in which market volatility declines, supported by fundamental and quantitative drivers," Kolanovic wrote. That decline in volatility would create "a positive feedback loop" in which hedge fund managers also would increase stock allocations. "This process may take most of 2021 to play out, as the economic recovery as well as inflows in the risky strategies are likely to be gradual," he added. The market's principal benchmark for risk appetite, the Cboe Volatility Index , has remained elevated even as the market has rallied. The VIX traded around 22 Wednesday afternoon, down from its late-October spike to 40 but still above its historical average near 20. Kolanovic sees the VIX continuing to decline through 2021, averaging about 17. A driving factor in the decline ahead of the "fear index" will be all the monetary juice coming from the Federal Reserve . In a response far more rapid than what it did during the 2008 financial crisis, the Fed slashed its benchmark short-term borrowing rate to near zero, instituted a slew of lending and liquidity programs, and has been buying at least $120 billion worth of Treasurys and mortgage-backed securities each month. With the Fed likely to keep up its ultra-accommodative stance, Kolanovic sees that holding volatility in check through 2021.

JPMorgan's Marko Kolanovic.

Crystal Mercedes | CNBC

J.P. Morgan Chase strategist Marko Kolanovic expects the stock market surge to continue through 2021 as the coronavirus recovery intensifies and volatility subsides.

As markets were falling apart in mid-March, Kolanovic called a recovery that has seen the S&P 500 post a 14% gain in 2020 after a breakneck dive into bear market territory at the pandemic's outset.

In his look ahead to next year, J.P. Morgan's global head of macro quantitative and derivatives research, expects a confluence of factors to bring another strong year.