3 Ways JPMorgan Is Going 'Risk-On' in 2020

JPMorgan says that investors should sharply boost their appetite for risk in 2020 by going overweight in stocks, while remaining underweight in bonds and shorting gold. “If cyclical or policy risks recede into 2020, it would be difficult for asset allocators to not accept higher equity weightings,” JPMorgan strategists, including Nikolaos Panigirtzoglou, Marko Kolanovic and John Normand, advise in a note to clients, per a story in Bloomberg. They say that cash and bonds offer “significantly” smaller yields than equities right now.

Julian Emanuel, chief equity and derivatives strategist at BTIG, is similarly bullish on stocks. He believes that the spread of zero-fee online trading will encourage investors to shift more money out of cash and bonds, propelling the S&P 500 Index to 3,950 by the end of 2020, nearly 26% higher than the open on Dec. 12, 2019. He has called the bond market "the greatest bubble ever," and expects falling bond prices in 2020 to be a key impetus for this asset shift, according to Business Insider.

Significance For Investors

JPMorgan sees global economic growth rebounding, and diminishing risks of a recession in the U.S. Among equities, they particularly favor Japanese banks, German stocks, and emerging markets stocks. They expect volatility to rise, and thus advise investors to hedge across asset classes.

JPMorgan expects that, like bonds, commodities and currencies also will deliver disappointing returns in 2020. The biggest risk in 2020, they believe, is the U.S. presidential election, especially if a progressive candidate such as Elizabeth Warren becomes the nominee of the Democratic Party. They suggest going long volatility on the U.S. dollar/Swiss franc pair as a hedge against this political risk.

"All great Bull markets (and love it or hate it, this is a great Bull market) have a point, usually near the end of the run, where the public investor 'falls in love' with the asset, frequently resulting in a parabolic move higher (and often subsequently, lower) over the course of weeks or months," Emanuel observed in a recent note to clients.

Emanuel expects the yield on the 10-Year U.S. Treasury Note to rise above 2% in 2020, with this result: "A move above 2% could also cause a sharp surprise as investors ponder the idea of losses to bond holdings in 2020 with the back drop of uninspiring yet steady economic growth-- in aggregate, a good environment for owning stocks."

Emanuel sees particular potential for a big rebound by stocks currently in the bottom performance quintile of the Russell 2000 Index in 2019, which also have short interest that equals 30% or more of their float, market caps over $500 million, and share prices above $5.

Sam Stovall, the chief investment strategist at CFRA Research, is also bullish on U.S. stocks but is more restrained than Emanuel. He projects that the S&P 500 will close 2020 at 3,435, or slightly more than 9% above the Dec. 12, 2019 open. He anticipates strong earnings growth, and cites historic precedents for stock market gains in presidential election years and following the commencement of monetary easing by the Federal Reserve.

Looking Ahead

Morgan Stanley remains a prominent bearish voice on Wall Street. Lisa Shalett, chief investment officer (CIO) at Morgan Stanley Wealth Management, sees weakening U.S. economic data that eventually will lead to disappointments among investors and a sell-off for U.S. stocks in early 2020.

Mike Wilson, overall CIO and head U.S. equity strategist at Morgan Stanley, shares that cautious view. He says that a flood of liquidity from the Federal Reserve and other central banks has created an artificial 20-year low in volatility and caused asset prices to "become detached from fundamentals." Both Shalett and he forecast a closing value of 3,000 for the S&P 500 in 2020, about 5% below today.