JPMorgan’s quant guru breaks down the market’s ace in the hole for fighting Trump’s trade war — and explains why stocks could surge 12%

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  • Investor nervousness has spiked in recent weeks as President Donald Trump has escalated his ongoing trade war with China.
  • Marko Kolanovic, JPMorgan’s global head of quantitative and derivatives strategy, breaks down what he says is a reliable stock-market backstop that will prevent large losses.
  • Kolanovic also explains why the S&P 500 could rise 12% from current levels by year-end.
  • Visit Business Insider’s homepage for more stories.

The recent escalation of President Donald Trump’s trade war with China has injected the stock market with something it hasn’t seen in a while: volatility.

The immediate result was the worst week of the year for the benchmark S&P 500. That weakness spilled over into Monday the following week, and then investors spent the next four days trying to claw their way back out of that tariff-sized hole.

As it stands now, US stocks are roughly 3% lower than they were before Trump reignited the trade war with a handful of tweets on May 5. That weakness has investors across Wall Street wondering if this is finally the headwind that could end the more than 10-year bull market.

Marko Kolanovic, the global head of quantitative and derivatives strategy at JPMorgan, is here to put their minds at ease. His base case for the trade war is that it will be resolved by year-end — a result that would surely give stocks a welcome boost.

Read more: We spoke with JPMorgan’s Marko Kolanovic, who can move markets with a single call. Here’s where he said investors should be putting their money.

And he’s certainly someone whose word should be heeded. After all, his calls were so accurate at one point that the entire market moved every time he wrote new research. No matter how you slice it, Kolanovic is one of Wall Street’s foremost quant gurus.

His optimism stems from what he calls the "Trump collar," which is the idea that the president only pushes the envelope on trade negotiations when stocks are strong, then makes concessions when the market sells off.

In other words, Kolanovic doesn’t think Trump would ever let the market truly fail. He estimates that the furthest Trump would ever let the S&P 500 fall is 3-4% before taking steps to stem the selling.

Read more: Buy Amazon and Google, sell Apple and Exxon: Here’s an in-depth look at Goldman Sachs’ newly unveiled strategy for fighting the trade war

As for where the S&P 500 will end the year, Kolanovic reaffirmed JPMorgan’s target of 3,000. However, he says a successful trade-war resolution would push that up to 3,200 — or about 12% higher than current levels.

But a trade-war agreement alone won’t get the market there. Kolanovic notes that there is also buying power lying dormant right now, waiting to be unleashed by the same machines that withdrew it initially. He says this is especially true since many investors pared risk exposure immediately after Trump’s initial tweets.

"The reason for our stance is the very low positioning across virtually all types of equity investors, and so far limited technical damage by the recent increase in volatility," Kolanovic said in note late last week. "Our base case was, and still is, that the trade war with China will get resolved this year, and we remain cautiously constructive."

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Source: Business Insider – jciolli@businessinsider.com (Joe Ciolli)

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