A stock market correction is imminent.
Those are sentiments shared by strategists at JPMorgan.
According to the strategists, the correction could come calling in the next few weeks as a plethora of weak economic data, continue to raise concerns. Payroll data, employment reports, and retail sales in the coming days are some of the releases that could trigger the correction.
“Some misgivings are justified given a macro backdrop that is becoming muddied, but not muddied enough to justify bearish targets or a defensive investment strategy,” say, strategists, led by John Normand, in a note.
What Will Be The Market Inflection Point?
The sentiments come at a time when major indices are flirting with all-time highs amid a weak economic outlook. The tech-laden NASDAQ index has already rallied to an all-time high as tech stocks continue to shrug off the uncertainty fuelled by COVID-19. In many cases, these tech stocks are even surging with demand.
The blockbuster move high in the equity market comes at the backdrop of growing concerns about the health of the U.S economy. Over 30 million Americans have lost their jobs at the back of the COVID-19 disruptions. While many companies have posted better than expected results, the numbers continue to confirm a slowdown in the U.S economy of which the JPMorgan strategists believe could hurt the stock market going forward.
August is one of the most bearish months on record in the stock market. Likewise, the strategists believe the second-quarter earnings may mark an inflection point that could see equity correct lower as the case for value in the equity market becomes the center of attention.
Sharing similar sentiments is the global head of quantitative research at Societe Generale Solomon Tadesse. According to Tadesse, there is more downside risk in the equity markets as investors continue to question the elevated valuation levels in the market. In addition, growing concerns about the availability of vaccines to combat the COVID-19 disruptions also continue to arouse concerns likely to fuel a correction in the stock market.
The S&P 500 has rebounded by 45% in four months from lows experienced in March. In contrast, the average rebound on record stands at 27% within a year. The extraordinary rebound, according to Tadesse, should be a point of concern given that it has come at the backdrop of weakening fundamentals.
Market Uncertainty & Volatility
The Bull run has mostly been driven by expectations of a coronavirus vaccine, which does not justify the extraordinary rebound. Currently, there are more than 200 vaccines under development, with none guaranteed to be effective on a global scale.
A lack of a vaccine means the U.S. economy could take much longer to bounce back to business after contracting by more than 20% in the recent quarter. A struggling economy amid a pandemic that refuses to go away should continue to weigh on investors’ minds in the market, a development likely to trigger a correction from current highs.
For how long the U.S. economy will rely on stimulus packages is another point of concern. Equities raced lower last week after it emerged Democrats and Republicans are entangled on an impasse over the extension of the unemployment benefits program. Escalating U.S-China tensions is another development likely to continue weighing on sentiments in the market after President Donald Trump said he plans to ban video-sharing app TikTok.