Analyst: The sharp drop in the stock market in August is absolutely normal, but investors should be cautious about bottom fishing

Analysts reminded investors on Friday to remain cautious in the current global stock market sell-off, as there is a risk of further price declines, and it may not be the right time to buy the dip.

A series of deteriorating US economic and financial data released this week has worsened the profit outlook for US stocks. On one hand, the US labor market continues to cool down, with the ADP employment report, known as "mini non-farm payrolls," falling more than expected, wage growth hitting a three-year low, initial jobless claims rising to a one-year high, and non-farm payrolls for July coming in significantly below expectations, pushing the unemployment rate to a nearly three-year high, and triggering the 100% accurate recession indicator - the Sam Rule.

On the other hand, there are signs of economic slowdown in the US, with the largest contraction in eight months in the July ISM Manufacturing PMI, intensifying concerns about a US economic recession. The market's worries about the "AI bubble" and investors' diminishing patience with AI returns, coupled with a strict scrutiny of tech giants' financial reports, have heightened risk aversion, leading to a sharp decline in US stocks, particularly in AI, chip, and tech stocks, marking a black start to August for the US stock market. Investors are beginning to worry that the Federal Reserve may be lagging behind in its actions to cut interest rates to avoid an economic recession.

The cooling US labor market could trigger a global economic slowdown, and investors' pessimistic expectations have also fueled bets on rate cuts in the UK and Europe, directly causing a plunge in European stocks on Thursday and Friday. The STOXX 600 index in Europe fell by 2.73% on Friday, with the European tech sector plummeting by over 6%. Stock indices in Germany, France, Italy, the UK, the Netherlands, and Spain all declined.

Asian markets were not spared either, with the Nikkei 225 index plummeting by 5.8% on Friday, and the TOPIX index falling by 6.1%, marking the largest drop since 2016. The Taiwan Stock Exchange Weighted Index closed 4.4% lower, while the KOSPI in Seoul dropped by 3.7%.

How does Wall Street view whether it is too early to buy the dip now?

Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital, stated in a research report released on Friday:

"The market seems to be entering a period of adjustment."

"Positive news on inflation, enhanced expectations of future rate cuts, and optimism about returns related to information technology and artificial intelligence drove stock prices higher in July."

"Although AMP believes that if an economic recession can be avoided, the low interest rate environment over the next six to twelve months could potentially boost stock prices, global stock markets appear poised for further declines, implying that now may not be the best time to buy the dip." Cedric Chehab, Global Country Risk Manager at BMI Research, said in a media interview on Friday:

"The current market sentiment deterioration is caused by a combination of factors, and such adjustments in the market are absolutely normal. The selling pressure started about a week and a half ago, but intensified further in the middle of this week, triggered by various factors."

He continued:

"Firstly, the hawkish stance of the Bank of Japan led to the collapse of short-term arbitrage trades. Additionally, unfavorable manufacturing data released by the United States and some employment-related indicators have also caused market panic."

"Then overnight, we saw significant fluctuations in the earnings of some large corporations. These factors combined have further dragged down the stock market, which was already relatively overvalued."

"Some investors seem to have overlooked a key factor, that stock markets usually experience seasonal volatility increases from July to October."

"Therefore, given the historical response patterns of the stock market to calendar effects, the current selling phenomenon is not surprising, especially after such significant increases in the U.S. and global stock markets."

"Such adjustments are completely normal when the market is overheated, especially when the upward momentum is excessive."

When asked whether investors should feel panicked in the face of this selling, Chehab responded:

"No, I don't think it's necessary. From a technical analysis perspective, the market still has solid support at moving averages and key technical levels."