The turmoil in the US stock market subsides, but analysts warn: beware of aftershocks!

In just two weeks, the strong rebound of the US stock market has already smoothed out the plunge in early August, the market is starting to be "extremely optimistic" about the US stock market. Although the chaotic situation has subsided, analysts warn that after a major earthquake, aftershocks often continue...

On August 19, Jim Reid, a strategist at Deutsche Bank, stated in a report that the current market conditions in August seem to have returned to normal, with panic quickly dissipating. The Nasdaq and S&P 500 indices have risen for eight consecutive trading days, quickly regaining lost ground.

The market fear index VIX also plummeted 51 points from its peak of 65.7 on August 5th, closing at 14.65 on Monday, marking the fastest retreat in history. Currently, the VIX has returned to levels from about a month ago.

Earlier this month, affected by the yen carry trade and concerns about the US economic recession, global stock markets plummeted, and Wall Street was in extreme panic. The VIX reached a peak of 65.7 on August 5, equivalent to the highs of the financial crisis and the early stages of the pandemic. On that day, the S&P 500 entered a correction phase but has since risen by 8.14%.

Although the chaotic situation has subsided, concerns about aftershocks persist, and some factors that catalyze market selling have not dissipated. The extreme reversal of the VIX index also indicates the instability of market sentiment, easily swinging between rapid optimism and sharp collapses.

"August 5th was a major earthquake, and after a major earthquake, aftershocks usually occur—we expect them to occur frequently until the (US) election," said Jay Woods, Chief Global Strategist at Freedom Capital Markets.

What are the other factors that could trigger market aftershocks?

Currently, many driving factors for selling have not disappeared, including weak global economic data, actual tightening of monetary policy, overvalued stock market valuations, and geopolitical concerns. The market still needs to be vigilant against potential fluctuations in the future.

Deutsche Bank pointed out in a research report that the current valuation of the US stock market remains high. Investors are paying a price-to-earnings ratio of 21.16 times for the next year's expected earnings of the S&P 500 index, which is on par with the levels in early summer and higher than the historical average of 16.57 times over 25 years. This means that investors are still paying a premium for future profits.

The current market is also expected to face a difficult period. Deutsche Bank's macro strategist Henry Allen referred to September as a "very bad month."

Late summer and September are often weak periods for the market. Data shows that the S&P 500 index has fallen in the past four Septembers, with 7 out of the last 10 years experiencing the same. September is also unfavorable for the bond market, as the Bloomberg Global Bond Index has fallen in each of the past 7 Septembers In addition, central banks around the world are tightening their monetary policies as inflation declines, with the real federal funds rate currently at its highest level since the financial crisis.

At the same time, the market sell-off in early August was actually relatively narrow, mainly led by the significant decline of the "Magnificent 7" in the US stock market, and did not reflect a broad overall market decline. Coupled with the uncertainty of the US election and geopolitical factors, these elements could once again lead to a surge in volatility.