5 reasons why stocks are still at risk of another sharp sell-off, Deutsche Bank says
- The stock market is still vulnerable to a sell-off similar to the one seen earlier in August, Deutsche Bank said.
- Stocks fell sharply earlier this month, driven by a weak economic data and recession fears.
August's seismic plunge in stocks was a short-lived experience, and the market is still vulnerable to a repeat episode, Deutsche Bank said in a new research note.
Major indexes tumbled earlier this month after a series of disappointing economic data and weak tech-company earnings. The unwinding of the Japanese yen carry trade compounded the situation.
While markets have since recovered, catalysts behind the retreat haven't necessarily evaporated, DB wrote. The firm outlined five key risks that remain that investors should watch:
First, equity valuations are still at historic highs, with the market trading in moderately overweight territory, the bank said. This made some on Wall Street uneasy even before August's sell-off and continues to be a point of anxiety as investments pile in.
Second, economic data remains vulnerable. Part of the reason equities dropped dramatically in August was a softer-than-expected nonfarm payrolls print, which disappointed estimates of 194,000.
This was an unwelcome sign of weakness, but not a recessionary reading, DB said. That leaves room for even more disappointing data, which could bring larger consequences to investors if it were to happen.
Third, monetary policy is getting increasingly tight on real terms, with DB noting that the real Fed funds rate recently hit its highest since 2007.
Fourth, September has been a seasonally bad month for stocks over the past few years. The S&P 500 has fallen during the period for four straight years, and in seven of the past 10.
DB says it's also been a bad month for fixed income, with the Bloomberg global bond aggregate falling during the past seven Septembers.
Fifth, geopolitical tensions are still high. DB notes that Middle East conflicts contributed to an equity sell-off in April, while oil prices also hit their highs for the year around the same time.
More recently, in August, oil saw their biggest single-day spike of the year on reports of further escalation, the firm said.