Stocks could trade 'drastically lower' on breakdown in trade between China and US, JPMorgan says

• JPMorgan has turned cautious on equities after months of being bullish, the analyst Marko Kolanovic said in a note on Thursday.
• Kolanovic said that despite his constructive view on equities since mid-March, equities could trade "drastically lower" on "a complete breakdown of supply chains and international trade."
• Rising tensions between the US and China could exacerbate the damage already done to supply chains by the coronavirus pandemic.
• Kolanovic is sticking to his forecast of stocks hitting all-time highs in 2021 but said he would like to see recent political risks show signs of normalizing before getting more constructive.
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After being bullish on stocks since mid-March, JPMorgan has dialed back its positive outlook following a nearly 40% rally in the S&P 500, Marko Kolanovic said in a note published on Thursday.

The analyst said there were two main risks that could justify stocks "trading drastically lower" going forward.

First, the politicization of the coronavirus pandemic could lead to delays in reopening the economy, and messages from politicians and the media could negatively affect consumer behavior.

The second is "a complete breakdown of supply chains and international trade, primarily between the two largest economies (US and China)."

Any increase in trade tensions between the US and China would put additional strain on a global supply chain that has already been damaged by the coronavirus pandemic.

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President Donald Trump has recently focused his ire on China, blaming the country for the pandemic and threatening to abandon a trade deal between the two countries. He's set to hold a press conference on China later Friday.

Kolanovic said that he wanted to see these political risks show signs of normalizing and that he ultimately thinks the politicization of the coronavirus "will backfire and will be abandoned, but some self-inflicted damage could perhaps happen first."

Still, despite the increasing risks for stocks, Kolanovic's current forecast is for stocks to hit all-time highs in 2021.

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