Why JPMorgan Sees 'Great Rotation' Sharply Boosting Stocks in 2020

Despite widespread concerns about high stock valuations and trade tensions, JPMorgan predicts a "great rotation" by retail investors from bond funds to equity funds in 2020, the biggest such shift since 2013, MarketWatch reports. As a result, individual investors will replace institutional investors as the key drivers of stock market gains.

“Given this year proved to be a strong year for equity markets, helped by institutional investors, then we should see retail investors responding to this year’s equity market strength by turning [into] big buyers of equity funds in 2020. This suggests 2020 could be another strong year for equities driven by retail rather than institutional investors,” according to JPMorgan analyst Nikolaos Panigirtzoglou.

Significance for Investors

JPMorgan notes that retail investors have taken “extremely cautious stance” in 2019, putting a brake on stock market gains. They also observe that 2012, 2017, and 2019 were the most recent years with strong flows into bond funds, and that such flows were weak in 2013 and 2018.

Nonetheless, Panigirtzoglou says that a "major challenge" to JPMorgan's forecast is high equity allocations among retail investors. However, he adds, recent central bank rate cuts have made the yields on cash and bonds increasingly less attractive.

As of Nov. 27, only 33.6% of retail investors were bullish, versus 34.2% during the prior week and the historical average of 38.0%, per the Investor Sentiment Survey by the American Association of Individual Investors (AAII). Meanwhile, 30.3% were bearish, versus 29.1% a week earlier and the historical average of 30.5%. The rest were neutral.

Among eight leading investment firms that had released forecasts as of Nov. 29, the average prediction is that the S&P 500 will end 2020 at 3,241, just 3.2% above its Nov. 2019 close, per The Wall Street Journal. Credit Suisse is the most bullish, at 3,425, or 9.0% above the November close. They expect strong corporate share repurchases in 2020, as well as earnings growth in the mid-single digits.

The most bearish strategist is Francois Trahan of UBS, who sees the S&P 500 sinking to 2,550, or 18.8% below the November close. “There is NO debate on S&P 500 forward earnings: a contraction appears imminent,” he writes, observing "significant slowdowns in the U.S. economy."

Looking Ahead

In the short term, Sam Stovall, chief investment strategist at CFRA Research, sees several factors suggesting rising U.S. stock prices in December, per his report titled "A Favorable Finale?" He cites growing optimism about the economy and a trade deal, upward momentum for several key market indices, plus historical precedents.

"Since 1945, the S&P 500 posted its best average return in December, along with the highest frequency of advance and lowest level of volatility," Stovall writes. He also notes that, from 1995 onwards, all 11 S&P sectors and 87% of 101 sub-industries within the S&P 1500 have been up, on average, in December.

For 2020, Morgan Stanley's U.S. equity strategy team led by Mike Wilson are notable bears, expecting tepid U.S. economic growth and virtually no corporate earnings improvement, per their recent "2020 Outlook" report. They project that the S&P 500 will end 2020 at 3,000, or 4.5% below its Nov. 2019 close.