Before the panic sell-off in the US stock market on Monday, the head of US market information in the trading department of JPMorgan, Andrew Tyler, issued a report warning not to buy on the dip. Tyler pointed out that the recent market trends may be somewhat excessive, and the actual economic situation is stronger than the risk assets, but trying to counter this market inertia is not a wise move. Investors can consider turning to tactical market neutrality or a net short bias. Product structure, 10-300 billion yuan products operating income of 401/1288/60 million yuan respectively.
In his report, Tyler wrote that when we think about the stock market in the coming weeks/months, he thinks it's worth looking at the comments from Dubravko Lakos-Bujas, JPMorgan's chief global market strategist, and Elan Luger, the head of global stock trading. Lakos-Bujas suggests diversifying investments by increasing the allocation of defensive and value-oriented stocks such as utilities, essential consumer goods, medical care, telecommunications and high-yield stocks, avoiding momentum tail risks, and getting away from cyclical risks such as industrial, non-essential consumer goods, financial sectors and unprofitable small caps. At the same time, he pointed out that its stock forecast does not take into account tail events. Although many events may become catalysts for increased volatility, rapid de-leveraging and sharp global market collapse, such as interest rate and foreign exchange risks due to different inflation and growth cycles in countries such as the United States and Japan, tightening global liquidity, elections and geopolitical risks.
Lakos-Bujas suggested diversifying investments by increasing the allocation of defensive and value-oriented stocks such as utilities, essential consumer goods, medical care, telecommunications and high-yield stocks, avoiding momentum tail risks, and getting away from cyclical risks such as industrial, non-essential consumer goods, financial sectors and unprofitable small caps. At the same time, he pointed out that its stock forecast does not take into account tail events. Although many events may become catalysts for increased volatility, rapid de-leveraging and sharp global market collapse, such as interest rate and foreign exchange risks due to different inflation and growth cycles in countries such as the United States and Japan, tightening global liquidity, elections and geopolitical risks.
Luger said,

• In terms of interest rates, the situation of global interest rates is now extremely tricky. If the Fed cut interest rates before, the market would panic, and now the Fed is "falling behind." Lower interest rates are good for small-cap stocks, but economic recession is definitely not. At the same time, Japan is entering an interest rate hike cycle. Volatility and financing rates are soaring, leading to massive liquidation. Japan's central bank's hawkish stance is a prelude to the Fed's shift of risk focus to the labor market's dovish stance, which has become a target of concern for the economic recession.

• In terms of the US election, Harris, who was nominated as the Democratic Party's presidential candidate, surged significantly ahead of Trump in just a few days. The competition between the two will be very intense, which means that investors cannot trade with either Trump or Harris. As the election approaches, the market needs to price in the tail risk of Democratic Party's dominance, which is not very friendly to the market. Luger said that looking at election data since 1996, the only sustainable trading during the election period is negative momentum trading. That is, selling winners and buying losers - reducing risk.

• Geopolitically, the situation in the Middle East is clearly deteriorating rapidly, which is not conducive to risk appetites.

Overall, Luger believes this is one of the most complicated backgrounds before the election in some time. It is almost impossible to have confidence in positions, which will give investors more reasons to reduce risk. Although he is not very pessimistic, he does expect the S&P 500 index to correct another few percentage points, and the volatility of the US stock market will remain high, and the volatility of various sectors will be very violent.
Tyler said in the report that he agreed with the views of the above two colleagues, because the market has quickly turned to the narrative of growth panic/recession. Therefore, he raised the warning at the beginning of this article that it is not wise to resist market inertia, and investors who have not yet taken action should consider turning to tactical market neutrality or a net short bias.
In the US market, Tyler expects that the Fed's rate cut will ease economic pressure, and consumers' interest rates should remain low until the first actual rate cut. The market is concerned about the Fed's policy mistakes and the weakness of the labor market may push non-farm employment data into negative growth. Although he thinks the economy still has a chance to achieve a soft landing, the market may have now turned to showing the state of a soft landing, and it is unlikely to ignore what he sees as a weak period, especially during the seasonal weak period. Until then, a defensive position seems to be the wisest choice.
Tyler mentioned that the past data calculated by his JPMorgan colleague Craig Cohen reminds us that the average drawdown in any year is 14%, but in years when the S&P index closes 10% or more, the average drawdown is 11%. This phenomenon has been confirmed in media reports last Friday. In addition, the Russell 2000 index has fallen by 3% for 17 consecutive days, and its average return after one year is expected to exceed 40%, with a probability of 100% growth. However, this may be a bumpy journey because the index is still lower during the six months after October 2008 and February 2020.

Tyler wrote that combining Cohen's data with the possibility of the US economy showing a positive but lower-than-expected growth trend, Fed support and unexpectedly high returns, predicts that the US stock market may usher in a year-end rebound starting from the end of September/early October.

As for this month, Tyler believes that there are still many catalysts in August. However, only when all the catalysts play a bullish role can the current stock market trend be reversed and return to historical highs. Otherwise, investors may hope to use these events in a very tactical way or use any rebound to find a better point to put until the market finds a level. Recently, JPMorgan's conversations with customers have shown that investors are looking to buy back at a range of 5200 to 5250 for the S&P, and this round of selling may still have a way to go. The key is that investors' positions have not yet indicated a buying opportunity on dips.