- A leading Wall Street analyst has offered a bullish stock outlook for the remainder of 2021 and early 2022 after a wave of massive selling.
- JPMorgan quantitative guru Marko Kolanovic based this prediction on indications that short sellers will soon be in a hurry.
- The macroeconomic outlook remains strong despite the surge of the Omicron variant, as coronavirus deaths have been mitigated.
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According to Marko Kolanovic, chief global markets strategist at JPMorgan, stocks are poised for a year-end and early 2022 rally as the recent sell-off looks exaggerated and portends movements of short sellers that will soon be squeezed.
In a note released Friday presenting his stock market outlook, the quantitative guru said US stocks were at 28% of their highs. But the overall market, as measured by the Russell 3000, is still up about 22% for the year.
“Such a divergence is unknown to us and indicates a historically unprecedented overshoot in selling smaller, more volatile, generally valuable and cyclical stocks over the past 4 weeks,” Kolanovic wrote.
Headlines attribute the market decline to the Federal Reserve’s more hawkish stance and the surge in Omicron coronavirus cases. The real selling, however, is due to risk reduction and short selling of hedge funds, he said.
But the conditions for a successful short selling effort do not exist, meaning that “this market episode could end with a short contraction and cyclical rally at the end of the year and into January,” Kolanovic predicted. .
He pointed out that funds targeting volatility and at risk parity add exposure, with strong value-to-growth rotation also underway. Overall, the situation from a technical or fundamental perspective does not resemble the massive stock market rout seen in the fourth quarter of 2018, he added.
Still, Kolanovic said “there is an aggressive short selling, possibly in the hope of lowering the position in retail stocks and cryptocurrency holdings – when in fact these markets and investors retailers have shown resilience in recent weeks.
These shorts now appeared to be tight. Large short positions will likely need to be closed before January, when he expects a rally in small cap, value and cyclical stocks. In addition, closing short positions can have a bigger impact than opening them, as liquidity conditions dry up.
Meanwhile, the Omicron variant looks less threatening to the stock market outlook. Even though vaccinated people are more vulnerable to infections, death rates are not increasing. In fact, in countries where the number of cases has increased like South Africa and the UK, deaths have declined in recent weeks, according to the note.
This follows public health agencies who have said the Omicron is more transmissible than the Delta variant but produces milder symptoms.
Kolanovic’s bullish note follows another he released on Wednesday that describes three reasons he expects stocks to continue rising next year.
“We continue to see a rise in equities with better than expected earnings growth, an improving environment for China and emerging markets and a normalization of consumption patterns,” he said, adding that US companies could post earnings growth above consensus of 14%.