DWS: No technical bear market in US stocks, closely monitoring market volatility risks
DWS Global Chief Investment Officer Bjorn Jesch stated that despite a 7% decline in the S&P 500 index, they still believe that a technical bear market has not yet emerged. They will closely monitor the risks brought about by market volatility, especially the situation where highly leveraged investors are forced to reduce their positions. They will also keep an eye on various indicators reflecting systemic risks. Currently, the market sentiment has reversed due to the impact of Trump's trade, leading to sharp declines in US small-cap stocks, the US dollar, and cryptocurrencies. DWS expects the Federal Reserve to continue its policy as planned and not change its stance due to market panic. Their baseline forecast is that the Fed will cut interest rates by 25 basis points three times in the coming months. While the possibility of the US entering a recession cannot be ruled out, it is expected to be a mild one. The bond market has already reflected a high probability of a recession, but considering the overall economic strength and the relatively robust financial condition of the private sector, the recession is expected to be mild
According to the financial news app Smart Finance, Bjorn Jesch, Chief Investment Officer of DWS Global, pointed out recently that the S&P 500 index has fallen by about 7% from its recent high. Based on DWS's fundamental economic and earnings forecasts, they still do not expect a technical bear market (defined as a decline of 20% or more, equivalent to the index falling below 4500 points) to occur. However, they will closely monitor the risks brought about by recent market volatility, including the forced deleveraging of highly leveraged investors. Therefore, they will also closely watch various indicators reflecting systemic risks.
Bjorn Jesch mentioned that following the volatile market conditions last Friday (2nd) and over the weekend, the financial markets did not stabilize on Monday (5th). The Japanese stock market recorded its largest decline since 1987 in the early session, with the sharp rise of the Japanese yen being one of the main reasons. The VIX volatility index surged from over 20 points to over 60 points in just a few hours, reaching a new high since the outbreak of the COVID-19 pandemic in early 2020. The "Trump trade" that has dominated the market sentiment recently has now reversed, leading to sharp declines in US small-cap stocks, the US dollar, and cryptocurrencies.
DWS expects that the Federal Reserve will stick to its established path of policy implementation and may not change its stance due to market panic. A sudden 50 basis point rate cut or an inter-meeting rate cut would be seen as a significant policy reversal, which the Federal Reserve will prudently avoid. On the contrary, DWS's basic forecast remains that the Federal Reserve will gradually start reducing interest rates by 25 basis points three times in the coming months starting in September.
While a recession in the United States is not DWS's basic expectation, the possibility cannot be completely ruled out. The bond market currently reflects a very high probability of a recession, with the yield on the 10-year US Treasury falling to 3.70%. However, even in the event of a recession, considering the overall economic strength and the relatively robust financial position of the private sector, it is expected to be a mild recession