JP Morgan: The Stock Market Is Doing Something Different

J.P. Morgan (JPM) is telling having conversations with its clients.  The word on the street: There is a strange miscorrelation to the performance, overall between the US and global stocks and how it won’t last.

As a result, the firm predicts international stocks will outperform the domestic market the rest of the year.

“The recent divergence in the performance of US Equities vs. the rest of the world is unprecedented in history. For instance, if one looks at price momentum – it is positive for US stocks and negative for Europe and Emerging markets across all relevant lookback windows [one month, three months, six months and 12 months]. This has never happened before,”

-Marko Kolanovic said in a note clients Tuesday.

The U.S. stock market has greatly outperformed emerging market stocks this year. The S&P 500 is up 7% year to date through Tuesday as compared to the iShares MSCI Emerging Markets ETF’s (EEM) 9% decline in the same time period.

Kolanovic a quantitative and derivative strategist,  also noted that because the relative moves between global markets are so unprecedented it will not likely continue.

“In other words, something will give – either the US will fall or EM and Europe equities will catch up and move higher,” he said, “We believe an escalation will likely be averted and that a trade resolution and weaker [U.S. dollar] will lead to a ‘risk on’ convergence,” the strategist said.

In a separate note Tuesday, J.P. Morgan’s Bram Kaplan explained the research team’s “risk on convergence” call, predicting emerging markets will outperform the U.S. stock market. He added that in this scenario the domestic stock market will still go higher, but not as much as international equities.

To take advantage of the prediction, the firm recommended Dec. 2018 call options on the iShares MSCI Emerging Markets ETF and buying derivatives that rise if the EEM outperforms the S&P 500 into year-end.

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