Equities may have shown signs of stabilising on Monday, but JPMorgan Chase & Co. strategists caution that coronavirus fears will weigh on investor sentiment and pressure stocks for longer, delaying a strong and quick rebound.
“Expect an imminent relief bounce,” said JPMorgan strategists led by Mislav Matejka. “The likely continued spreading of the virus, though, as well as the more extended activity fallout, suggests that markets will struggle to rally sustainably, potentially leading to derisking into any strength.”
JPMorgan strategists say that virus contagion rates will need to peak first, which they expect to happen in April-May, before stocks can see a lasting recovery, taking the S&P 500 to a new historical high. The negative impact from the epidemic, while serious, is unlikely to keep crimping economic growth in the second half of this year as central banks step up support measures, according to JPMorgan.
Global equities initially advanced on Monday amid optimism that central banks will help cushion markets from the impact of the coronavirus after spreading infections prompted the worst week of declines since the 2008 financial crisis. However, European stocks erased gains in early morning trading after data showed that euro-area factories suffered supply disruptions from the epidemic and the Organization for Economic Co-operation and Development slashed its global economic forecast.
The JPMorgan analysts are adjusting their outlook for risk assets after arguing in early February that the bigger the short-term decline in equities because of the coronavirus, the stronger the eventual bounce would be. At the same time, they are maintaining their underweight recommendation for U.S. and U.K. stocks and an overweight call for the euro area and Japan.
Others have turned more optimistic about the outlook for stocks after last week’s slump. Sanford C. Bernstein analysts led by Inigo Fraser-Jenkins said on Monday that their models are signaling that investor fear has gone too far and it’s time to load up on global equities.
BCA Research upgraded its three-month view on global stocks to overweight, saying the economic downturn from the virus will be short-lived and the U.S. Federal Reserve will likely lower rates.
The JPMorgan strategists also said that monetary policy officials will increase their supportive measures. On Monday, the Bank of Japan hinted at easing, and the Bank of England pledged to “ensure all necessary steps are taken to protect financial and monetary stability.” The U.S. Federal Reserve on Friday issued a rare statement that opened the door to a rate cut based on the “evolving risks” posed by the outbreak.