Despite stock investors' rush for the exits in recent days on trade war fears, JPMorgan Chase & Co. (JPM) says now is the ideal time to dive into the market and “buy the dip” amid what the company says is a still strong economic outlook. “Our core view remains that one should use the prospective weakness as an opportunity to add further, similar to the May experience,” said a team of strategists led by JPMorgan's Mislav Matejka. “We continue to believe that global equities will advance further before the next U.S. recession strikes. We think that the growth-policy trade-off is far better now than it was in 2018.” JPMorgan's buy the dip strategy was outlined in a detailed story in Bloomberg.
With the S&P 500 down about 6% from its recent record high and 98% of the stocks in the index falling on Monday, the opportunities look ripe. With that in mind, JPMorgan recommends that investors remain overweight U.S. stocks and neutral on euro zone equities because of stronger earnings growth among American companies.
What It Means For Investors
JPMorgan's view contrasts with a market that saw equities lose as much as $1 trillion on Friday and continued to slump on Monday as the Trump administration announced a 10% tariff on an additional $300 billion worth of imports from China, prompting China to retaliate with several measures including a devaluation of the yuan. Stocks rose more than 1% on Tuesday across the major indexes.
In this environment, JPMorgan’s strategists say investors should focus on the supportive, broader macroeconomic forces that will boost stocks. That includes looser monetary policy from the U.S. Federal Reserve, strong economic data, and equity valuations that don’t look overly “demanding.”
Sundial Capital Research Inc. and Bespoke Investment Group support JPMorgan's view. They say that steep declines from multi-year highs tend to be followed by rapid rebounds. In the 16 cases since 1929 when the S&P 500 fell more than 5% within two weeks of hitting multi-year highs, it quickly rebounded in 10 of those cases and fell into a correction the other six. Not once did the index slide into a bear market over the next six months, according to Bloomberg.
“These kinds of declines tend to generate a lot of fear, because it’s so out of line with what investors had recently become accustomed to,” Jason Goepfert, founder of Sundial, wrote, per Bloomberg. “But they only rarely—never?—morphed into a truly serious and protracted decline over the next six months.”
Warning signs of a looming recession, nonetheless, are getting bigger, with the yield curve inverting to its steepest level since the lead-up to the 2008 crisis. David Rosenberg, chief economist and strategist at Gluskin Sheff, is ringing his own alarm bell based on what he sees as a Federal Reserve-induced bubble in corporate debt. Every boom-and-bust cycle contains its own bubble of sorts and this time around that bubble is on the balance sheets of U.S. corporations, he says. “My thesis all along has been that this will be a capital spending-led recession,” Rosenberg said, according to Business Insider. “We’re going to be finding a lot of the cash flows being diverted to debt service—even under this low rate environment—and away from capital spending.”
Exactly whether and when Rosenberg’s thesis will play out is unclear. Until then, JPMorgan and it's clients will be out buying. Goldman Sachs also is bullish, and expects higher corporate earnings to lift the S&P 500 to 3100 by the end of this year and 3400 by the end of 2020.