- Thursday’s steep drop in the Dow Jones industry average of nearly 2,000 points was likely caused by no further policy action announced by the Fed, JPMorgan said in a note on Friday.
- But the sale “has likely removed some of the foam in the equity positioning space” and will help “rejuvenate the rising equity market,” the note said.
- The bank still sees a lot of upside for medium- and long-term stocks and thinks that global stocks could rise 47% from current levels.
- JPMorgan highlights four key trends that “still point to many benefits for medium and long term actions”, including a rapid economic recovery after the coronavirus pandemic.
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Thursday’s strong liquidation helped “rejuvenate” the rising equity market – and in the medium and long term, global stocks could rise 47% from current levels, according to a note from JPMorgan on Friday.
The bank blocked most of the blame for selling the Dow nearly 2,000 points Thursday at this week’s FOMC meeting without further policy measures announced by the Fed. Investors were probably expecting an accelerated rate of quantitative easing, as financial conditions could tighten without further stimulus from the Fed, the bank said.
But JPMorgan believes the recent sale has been healthy and has helped remove some of the foam that was forming in the markets. The bank is probably referring to the surge in retail and increased interest in risky stocks like Hertz and Nikola Motor, among others.
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“With some of these previous pockets of over-extension compensation, we believe that the equity positioning context will be reaffirmed by rejuvenating the bull market in equities which, in our opinion, is still supported by four medium and long term engines which are still in place. ” Said JPMorgan.
The company has identified the following four long-term market drivers:
1. “A context of global positioning still weak” – Investors are underweight equities.
2. “Rapid healing of the funding markets” – Businesses can access the credit market to contract debts at reasonable interest rates.
3. “A structural change in the liquidity and interest rate environment” – Don’t fight the fed.
4. “A rapid economic recovery driven by a regular relaxation of the lockdown”
JPMorgan said that the positioning of non-bank investors (households, companies, pensions, etc.) in stocks, bonds and cash “still points to many benefits for stocks in the medium and long term”.
Read more: “Textbook recession-recovery trade”: 3 titans of the Wall Street stock market strategy explain why the latest plunge in the market is actually “healthy” – and share their views on what follows
Analysts have pointed out that equity positioning – after taking into account Thursday’s liquidation – is still at the bottom of the post-Lehman crisis period.
“Not only is the current 40% share allocation still below historical averages, it is also well below the 49% peak seen in early 2018,” the bank said.
JPMorgan expects equity allocation will eventually climb back to a peak of 49% in 2018 thanks to low interest rates and increased liquidity from the Fed. And for that to happen, it “would require a 47% increase in global stocks from here.”