The market’s summer slide is about half over and won’t be as devastating as the selloff that wreaked havoc at the end of last year, according to a cross-asset strategy team at JPMorgan Chase.
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“Since corrections tend to be largest when markets are expensive and over-owned and when market depth is poor, these indicators give a sense of vulnerability even if they cannot anticipate the timing of a random shock,” wrote John Normand, head of cross-asset strategy at the bank.
The stock market fell as much as 6.7 percent this summer amid fears the U.S. economy was headed toward a recession.
The size and scope of the selloff are nowhere near the damage that was done in the fourth quarter of last year when the S&P 500 plunged 19.6 amid uncertainty fueled by the trade war.
“A recession is avoidable, but drawdowns are not,” Normand wrote, adding that trade uncertainty is having the biggest impact on markets, with the impeachment saga contributing to negative risk sentiment.
When a shock occurs JPMorgan looks at valuations, implied volatility, positioning, price momentum and market depth to determine the magnitude the drawdown. This time around the bank vulnerabilities were moderate.
“The message across all indicators is that this correction is about half complete, and should prove much shallower than last year’s,” Normand wrote, adding a trade truce that rolls back tariffs would serve as a tax cut and further Fed easing would also help.