JPM’s Kolanovic Lays Out A Scenario In Which Trump’s Illness “Boosts His Election Chances”

JPMorgan’s head quant Marko Kolanovic was quick to cut to the chase today and opine on what truly matters in the aftermath of Trump’s covid diagnosis: the bank’s S&P price target, which as the Croat wrote in an “Update on overnight developments” remains unchanged, to wit:

In light of recent developments, the positive COVID-19 test for the US President and First Lady, we are not changing our price targets or outlook across asset classes. Our equity outlook remains positive with a  (scenario-weighted) S&P 500 year-end price target of 3600.

Additionally, the JPM quant writes that the bank’s outlook for styles remains that “value will outperform momentum and growth under any election outcome” while on sectors his view “is that cyclicals will outperform also under any election outcome.”

But enough about markets, what about Kolanovic’s take on politics, which sadly these days is what every market strategist has become an expert in? According to the quant, “the current development across various scenarios for the President’s illness slightly increases Biden’s chance of winning, which could marginally reduce post-election risks and market uncertainty.”

But what is curious is a scenario from Kolanovic which we are confident he will get a lot of heat for, namely one “in which a combination of voter sympathy, turnout and an asymptomatic or mild virus outcome boosts Trump’s election chances (e.g. vindicating his strategy of opening by example).”

Then quickly going back to markets, Kolanovic lays out another market-friendly outcome in which “a significant health deterioration acts to lower tensions and animosity on both sides of the aisle, paving the way for national reconciliation and likely increasing Republicans’ odds in Congress.”

Underscoring his bullish view, Kolanovic repeats that “positioning remains low” which however Morgan Stanley completely disagrees with, finding last week that adjusted hedge fund net leverage is at all time highs as we noted recently:

Panicky HF flow is also limited as the “crowded” HF trades, where gross and net leverage is high, are working. Crowding is concentrated in high quality Cyclicals and Defensives but the common themes are secular growth winners with low EPS volatility – performance has been very strong in these areas (left chart below).

That said, one final optimistic take per Kolanovic is that “the probability of an early phase 4 stimulus is likely increasing” as such he expects 3Q earnings delivery and outlook “to remain constructive as earnings again come in ahead of expectations and balance sheet trends show further improvement.”

Judging by the market’s impressive reversal higher, especially after House Democrats hinted of an airline bailout possibility, traders seems to agree with Marko.