The first quarter of 2019 could see a rally in stocks if the Federal Reserve “skips” its meeting in March and doesn’t increase rates again. That’s according to a note from JPMorgan (NYSE: JPM) from late last week.
“Signs of capitulation by institutional investors are creating a window of opportunity for equity markets into Q1 assuming the Fed reacts to market stress,” wrote JPMorgan analyst Nikolaos Panigirtzoglou.
This comes after the Fed raised its benchmark rate for the fourth time this year last week.
After the meeting, stocks climbed initially in reaction to the central bank lowering its forecast for rate hikes next year from three hikes to two. But after the post-meeting press conference, stocks fell sharply again after Fed Chairman Jerome Powell came off as not as “dovish” as Wall Street was hoping.
Whether the Fed proves to be more dovish next year remains to be seen, but Panigirtzoglou believes that will be the determining factor on if stocks get a boost in the new year or not.
“If such dovish shift does not materialize and the yield curve inversion fails to improve, any equity rally in Q1 would most likely be short lived,” Panigirtzoglou said.
Panigirtzoglou also said that the bank sees an “important headwind” for stocks “now significantly reduced” as real money investors worldwide are no longer bullish on stocks. That was no more apparent than on Christmas Eve when stocks briefly entered a bear market.
“The equity market declines over the past few months have erased real money investors’ previous equity overweights, reducing the need by these investors to actively sell equities from here,” Panigirtzoglou wrote.