- The stock market is still vulnerable to a wave of selling like in early August, Deutsche Bank said.
- Due to weak economic data and fears of a recession, stock prices fell sharply at the beginning of the month.
- The triggers for a decline, such as a deterioration in macro data, are still present, DB explained.
The massive slump in stock prices in August was short-lived and the market is still vulnerable to a repeat, according to a new research note from Deutsche Bank.
Major indices plunged earlier this month following a series of disappointing economic data and weak earnings from technology companies. The unwinding of the Japanese yen carry trade further exacerbated the situation.
Although markets have since recovered, the triggers for the decline have not necessarily disappeared, DB wrote. The company outlined five main risks that investors should continue to keep an eye on:
First, equity valuations are still at historic highswith the market trading in a moderately overweight range, the bank said. That worried some on Wall Street even before the August sell-off and continues to be a concern as investments pile up.
Second, economic data remains vulnerable. One of the reasons for the dramatic decline in stock prices in August was weaker-than-expected nonfarm payrolls numbers, which disappointed estimates of 194,000.
This is an unwelcome sign of weakness, but not a sign of a recession, said DB. This leaves room for even more disappointing data, which, if it were to materialize, could have even greater consequences for investors.
Third, monetary policy is becoming increasingly restrictive in real termsDB noted that the Fed’s real policy rate recently reached its highest level since 2007.
Fourth, September was a seasonally bad month for stocks in recent years. The S&P 500 has fallen four years in a row during this period and in seven of the last ten years.
According to DB, it was also a bad month for fixed income, with the Bloomberg total value of global bonds falling over the last seven months of September.
Fifth, geopolitical tensions remain high. DB points out that conflicts in the Middle East contributed to a sell-off in stocks in April, while oil prices reached their annual highs around the same time.
The company said the most recent daily increase of the year was in August due to reports of a further escalation in oil prices.
