JPMorgan's new market strategy director, Dubravko Lakos-Bujas, wrote in his first report that the recent collapse of the US stock market has dispelled some of the bubbles in the market, but if economic growth continues to slow down and the Federal Reserve does not show urgency in loose monetary policy, holding positions and valuations still face risks.
According to the Futu Securities News App, Dubravko Lakos-Bujas, JPMorgan's new market strategy director, wrote in his first report that the recent collapse of the US stock market has dispelled some of the bubbles in the market, but if economic growth continues to slow down and the Federal Reserve does not show urgency in loose monetary policy, the US stock market still faces the risk of further decline.
Lakos-Bujas said to clients on Thursday that traders are concerned about inflation trends in the first half of the year, but their concerns have shifted mainly to rising earnings expectations and economic risks.
He said that "stocks are no longer a one-way up trade, but more and more a debate about the risk of growth slowdown, the timing of Fed interest rate cuts, crowded positions, high valuations, elections, and geopolitical uncertainties".
On Wednesday, JPMorgan economists led by Lakos-Bujas raised the likelihood of a US recession by the end of the year from 25% at the beginning of last month to 35%. The bank's internal view is that the Fed will cut interest rates by 50 basis points at the September and November meetings, followed by another 25 basis points at subsequent meetings until the central bank is confident that the economy is on track.
US equities rebounded on Thursday following softer than expected US jobs data for July, which helped to alleviate concerns about a further economic slowdown following last week's release. The S&P 500 index was up 1.9% at midday, having experienced its largest one-day decline since nearly two years on Monday.
However, Wall Street professionals remain concerned whether Monday's global stock market selloff was the worst of a correction or if there is more to come.
In Lakos-Bujas' view, the US stock market is easily affected by extreme positions and momentum crowding, which has historically led to severe sell-offs, as was the case earlier this week.
Lakos-Bujas believes that Monday's volatility was a "replay of the volatility doomsday". He said that in the case of massive selling, the Chicago Board Options Exchange Volatility Index (VIX) soared to its highest level since 2020, similar to the flash crash that occurred during the sudden market turmoil in 2018 and 2015. The weakening of momentum trading in technology giants and AI darlings, seasonal weakness (August and September are traditionally the weakest months in the stock market), and uncertainty about the US election have also led to the recent struggles of the stock market.
The JPMorgan team is most bullish on reasonably-priced, defensive and low-volatility stocks, as well as the utility sector, followed by quality growth names such as large-cap tech and semiconductor stocks. Meanwhile, speculative growth, cyclical stocks and small-cap stocks are the areas the bank is least optimistic about.
As for the stock rotation in July, where investors flocked to small-cap and less popular stocks, Lakos-Bujas said that it is the beginning of "closing the cycle rather than full-power sprint at the end of the cycle". The bank also pointed out that this is the third such stock rotation in the past 12 months, the first two being the Fed's turn in November to December and inflation panic in April.
Lakos-Bujas said: "Although the current magnitude of the loosening is the largest of the three, it is still far below the historical average level of momentum collapse, which usually occurs when the business cycle transitions from contraction to recovery."
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