Marko Kolanovic -Why the S&P 500 Can Hit 3000

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Amid last week’s selloff, JPMorgan strategist Marko Kolanovic remained a bull. His quant models told him the drop in stocks was amplified by automated hedging programs. On Wednesday, we asked him to walk us through the reasoning that’s allowed him to resist the emotions gripping most pundits. He also shared his outlook.

Barrons.com: So this isn’t Armageddon?

Kolanovic: The selloff was almost entirely technical, driven by programmatic trading strategies like options hedging. In addition, you had the closure of some of the “short-VIX” products [which bet against a rise in the Cboe’s VIX index of volatility]. The unwinding of these products put upward pressure on volatility and even downward pressure on the S&P. And liquidity was very thin. Futures liquidity was the worst last week since we’ve tracked it.

Are there no cracks in the market’s stilts?

Investors started putting some fundamental stories behind the selloff, saying “It’s the deficit” or “It’s runaway inflation, which will cause the Fed to hike rates faster than usual.” But their fundamental story was just a story. The press put too much emphasis on the deficit and inflation.

Wednesday’s [consumer price index] print proves my point. The market rallied very hard after that relatively high CPI report [of a 0.5% rise in January, compared with an expected 0.3%]. According to these stories, the market should have been down. The CPI was sort of a nonevent.


Aren’t rising rates a fundamental problem?

Rates at some time will be a problem, but we don’t think yet. We had 10-year yields well above 3% in 2010 and 2011, but we had much worse fundamentals back then and people were not as concerned. If you look at the amount of speculative shorting of Treasury bonds right now, it’s at record levels.

What fundamentals give you confidence?

Earnings fundamentals are very strong, both organically as well as from the impact of tax reform--which we think is not yet fully priced in. Both will drive upward revisions [of earnings estimates]. So you have strong bottoms-up corporate fundamentals, and then you also have strong global growth.

This is an opportunity to buy the dip. The last three days the market has been going up, so our call to “buy the dip” was the right call. We do think that we’ll recover. We did not change our price targets for the year end.

Today [Wednesday], the S&P 500 index stands at 2675. What’s your target?

Our year-end 2018 target is still 3000.

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