JPMorgan: Equity Bull Market Set To Resume. Central Banks Matter More Than Fiscal Stimulus

Over the past two months, the consensus narrative vis-à-vis policy and stimulus generally revolved around the notion that central banks are no longer the primary driver.

“At this point, monetary policy is not the most decisive factor,” Deutsche Bank’s Aleksandar Kocic said in September. “In its current form, it is likely to stay in place with possibly slight adjustments, and remain reactive to fiscal policy, which together with advances in vaccine developments, should remain the main drivers that would shape/influence the economy.”

“Fiscal is the new QE,” Nomura’s Charlie McElligott remarked earlier this month, summing things up.

Read more: For The World’s Largest Economy: Two Possible Futures

Given that, the lack of a deal on another fiscal stimulus package was a source of some consternation for markets, and the outlook for the fiscal impulse going forward obviously hinges on the election.

But, if you ask JPMorgan’s Nikolaos Panigirtzoglou, it’s central banks that matter more over the medium- to longer-term when it comes to equities.

“We believe that, similar to September, this month’s correction offers a good entry point to equity investors over the medium to longer term once US election uncertainty subsides next week,” he wrote, in a new note.

Panigirtzoglou references a model that’s familiar to those who follow his work. He calls it the “most holistic” measure of equity exposure. It takes into account global non-bank investors’ holdings of bonds, equities, and cash (M2), and it still suggests stock allocations are well below cycle highs.

At 39.73% the equity share is “still significantly below its post-Lehman period average of just over 42% and well below the cycle high of 47.6% in early 2018,” he said late last week.

In the same note, Panigirtzoglou walked folks through some math. In order for the implied equity allocation of non-bank investors to hit the post-Lehman peak of 47.6% (seen in the euphoric melt-up following the Trump tax cuts in January of 2018, just prior to the implosion of the VIX ETN complex), global equities would need to rise 47% and the S&P 54%. Those figures “assume the stock of cash or money supply rises by another 7.5% from here and the stock of debt by another 5%.”

Elaborating, Panigirtzoglou said “the upside for equities over the medium to longer term depends more on debt and liquidity creation and thus central bank QE than on fiscal stimulus.”

He doesn’t deny that the size of any post-election fiscal package in the US will have an impact. It’s just that he thinks it will be more consequential for the shape of the yield curve and the breadth of the stock rally than for equity price gains themselves.

The scope of post-election stimulus, Panigirtzoglou wrote, will help determine whether the “equity bull market would encompass value and traditional cyclical sectors or continue to be more narrowly focused on high quality and growth oriented stocks.”

In other words: Post-election stimulus will be one factor in determining whether stock gains continue to be synonymous with FAAMG gains, or whether other companies get a chance to play too.

As far as the second wave of the virus is concerned, he says that new lockdowns and the assumed deleterious read-through for growth “could bolster… equity upside via inducing more QE and thus more liquidity creation.”