Marko Kolanovic Says ‘Trump Recession’ Stock Tilts Won't Last

(Bloomberg) -- Corners of the stock market are pricing in a “Trump recession” and investors should get ready for a bounce, according to JPMorgan Chase & Co. strategist Marko Kolanovic.

Concern President Donald Trump’s trade war against China will sink the economy have chased investors out of economically sensitive stocks and into defensive shares, Kolanovic said. With the rotation widening valuation spreads too far, value and high-beta stocks could stage a rally of as much as 20% in the short term should an agreement be reached, he added.

“The U.S. economy is facing a quite unique situation in which one individual can disrupt global trade and investment plans of U.S. corporations, tax consumers on a broad range of imports,” Kolanovic wrote in a note. “Given all of this -- why are we not bearish on equities and the economy? Because this situation can also be undone on short notice and many market segments already price in worst-case outcomes.”

While some investors have turned cautious on equities since Trump last month escalated the trade spat, Kolanovic reiterated his view that the president is under pressure to strike a deal with China to boost his odds of getting re-elected. Should he, the broad market could post “a quick” rally of 5%.

“If there is a trade deal, which would be rational to expect going into election year, we think that about half of the market damage could be quickly reversed,” Kolanovic said. “Low investor positioning and an unprecedented divergence between defensive and value market segments warrant exposure to trade-sensitive and high-beta segments, which are now largely pricing in a recession.”

The Group of 20 summit in Japan later this month might be a forum where Trump and his Chinese counterpart Xi Jinping are able to meet and restart trade talks, U.S. Commerce Secretary Wilbur Ross said earlier in an interview on Bloomberg Television.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Chris Nagi, Jeremy Herron

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