The most bearish month in the equity market is here with us. While August did begin on a positive note with equities racing higher, a cloud of uncertainty hangs in the balance. With the havoc causing pandemic refusing to go away, strategists at JPMorgan believe a stock market correction could be imminent. Sharing similar sentiments is Solomon Tadesse on Societe Generale.
JPMorgan Warning
According to JPMorgan strategists, a modest stock market correction could come calling in the coming weeks supported by bearish sentiments in August. According to the strategists, weak economic releases such as payroll and retail sales report could sway investors to exit positions given the ever-growing concerns about a slowdown in the overall economy.
The sentiments come at the backdrop of Republican and Democrats struggling to reach an agreement over the extension of the unemployment benefits program. The program has so far helped cushion millions of people who have lost their jobs, on COVID-19 disrupting key sectors of the economy. The stimulus program has also helped boost liquidity levels in the economy.
According to Solomon Tadesse, a big dose of reality looms large as equities have run ahead of fundamentals. Since March, the markets have shrugged off the economic destruction triggered by COVID-19. Equities have raced higher on expectations of a V-shaped recovery at the back of a coronavirus vaccine.
Downside Risk
Tadesse sees more downside risk form the markets given the uncertainty around Coronavirus. The fact that the market appears to have overshot amid weak underlying fundamentals is another development that continues to fuel suggestions of a potential correction in the market.
The market appears to have overshot with the recent rebound, following the March 23 crash. While market have rebounded by an average of 27% within a year after a correction lower, that has not been the case this year. The S&P 500 is up by more than 40% from March lows. Likewise, a correction looks likely as most counters appear overstretched.
