- Stocks still have plenty of room to rise from current levels, according to a note published by JPMorgan on Friday.
- The bank largely pointed to investors' underweight equity positioning as a main driver for stocks to move higher over the medium to longer term, despite near-term risks of elevated momentum.
- Investors' allocation to stocks is 40%, which is below historical averages and is well below the early 2018 high of 49%.
- With bonds yielding next to nothing, investors may return to stocks and drive up prices as fears over the coronavirus pandemic subside.
- Here are the five charts JPMorgan pointed to in support of its bullish view on stocks.
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Stocks still have "plenty of room" to rise further from current levels after a nearly 40% rally off the lows, according to a note published by JPMorgan on Friday.
The bank acknowledged that short-term risks are present, especially with elevated momentum positioning by traders, which signals overbought levels.
But over the medium to longer term, JPMorgan said it thinks stocks are the place to be.
The short-term overbought condition is "not enough by itself to stop or derail a bull market underpinned by four medium to longer term drivers," the bank said.
Those four drivers include a still-low overall equity positioning backdrop; a rapid healing of funding markets; a structural change in the liquidity and interest rate environment; and a rapid economic recovery driven by steady lockdown relaxation.
Part of JPMorgan's argument is similar to a recent note from Bank of America, which pointed to a potential "Great Rotation" by investors from bonds into stocks.
Despite the nearly 40% rally in stocks since the March 23 low, investors' stock allocation "isn't much different from last March's backdrop as the rise in cash holdings and the expansion of the value of the bond universe partly offset the equity rally," the bank said.
JPMorgan said it thinks investors will increase their allocation to stocks given the favorable backdrop of high liquidity and low interest rates.
Here are the five charts JPMorgan used to expand on its reasoning for being bullish on stocks.
1. Short interest remains elevated
This chart is a short interest proxy of the S&P 500 index. It shows that bearish traders still have elevated short bets on the market. As the market grinds higher, the bank expects shorts to cut their losses and close out their short positions, which would creating buying pressure in stocks.
2. Investors are underweight stocks
Non-bank investors currently have a 40% allocation to equities, which is below its historical average and below its 2018 high of 49%.
The chart shows that there is plenty of room to move higher for investors' allocations to stocks.
JPMorgan believes equilty allocations are likely to increase over the next few years thanks to low interest rates and high liquidity.
Investor fear surrounding the coronavirus pandemic would likely help improve equity positioning as well.
3.Investors are overweight bonds
On the flip side of investors' low equity positioning, is their current allocation to bonds.
Investors rushed into bonds amid the coronavirus pandemic, pushing the bond allocation to 24%, well above its historical average of 19%.
As investor fear over the virus subsides, and investors wake up to the near-zero interest rates they're receiving with their fixed income holdings, it is very possible that they will rotate into stocks, according to JPMorgan.
4. Cash positions remain elevated
JPMorgan's implied cash allocation level has also spiked amid the cornavirus pandemic, but remains at its historical average of 37%.
The bank said given cash yields are zero across the board for the foreseeable future, "it remains reasonable to expect this cash allocation to decline further over the medium to longer term."
With more than $4 trillion in cash on the sidelines, JPMorgan isn't the only one looking for that cash to be put to use into stocks.
5. Funding markets are healing
Most important to the economy is the ability for credit markets to function properly.
If a company is cut off from raising new debt in the credit markets, it could be put in a poor position that ultimately ends in bankruptcy.
Fed Chair Jerome Powell's main mission with the Fed's monetary stimulus policies, such as buying high-yield debt, was to make sure the credit markets could still function, and companies could still raise much-needed money amid an economic crisis.
It looks like Powell's actions helped calm the credit markets. Besides back-to-back record debt issuance by corporations in March and April, JPMorgan pointed to the spread in Libor interest rates stabilizing at levels around 30 basis points as evidence that the credit markets are functioning properly.
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