Up and down, then up, then down again. The market this month has felt like a never-ending rollercoaster.
And while we’ve seen a bit of a recovery this week after last week’s big drop, JPMorgan (NYSE: JPM) is warning investors to stay cautious for the rest of August and to wait until next month before thinking about buying back in to stocks.
The bank doubled-down on its guarded stance and prediction of a market pullback, and noted that better seasonal data, potentially more central bank easing, and a possible postponement of tariffs on Chinese goods could help spur the market higher in September.
“At the overall market level, we continue with our tactical cautious stance, advocating a market pullback during August,” strategists led by Mislav Matejka wrote in a note, but “we do not believe that the current pullback will extend for longer than the May one did, and still expect to step in early September.”
Last week saw major stock indexes around the world fall, worsening sharp month-to-date declines, after the yield curve between the 2-year Treasury and the 10-year note inverted last Wednesday. The inversion—which is widely considered to be an ominous and reliable signal that the U.S. is heading into a recession—sent investors scrambling out of risk assets and into safe havens.
Since then, the yield curve between the 2- and 10-year notes flattened and then inverted again this Wednesday, then inverted again early Thursday.
While many investors have opted to sell stocks in the wake of the recession fears sparked by the inversion, the sell-off has had some wondering if cheaper prices make for a good buying opportunity despite the yield curve inversion.
For Matejka, while it’s important to be aware of the inversion, it doesn’t necessarily mean that stocks can’t still hit new highs in the months before a possible recession.
“Put together, the curve inversion might be more an indicator of extreme market nervousness at present, of increasing central banks action, skewed bond ownership, and of global search for yield, rather than a sure sign that U.S. is about to enter a recession,” the JPMorgan strategist said.
“We continue to think that, post the August correction, equities will make new all-time highs into 1H of next year,” Matejka continued. “Having said that, this development nevertheless increases the chances of a potential peak of the market for this cycle in summer 2020.”