Be cautious! Negative factors driving the sharp decline in US stocks may once again sweep in

According to the financial news app Zhitong Finance, Deutsche Bank recently pointed out that the recent stock market sell-off turmoil in the US may just be a temporary episode in the upward trend of the stock market. However, the institution also warned that even though market sentiment and technical indicators have stabilized and the S&P 500 index has rebounded significantly, many of the catalysts that led to the summer sell-off wave in the US stock market have not completely disappeared.

Earlier this month, the July US non-farm payroll report showed that job growth was far below expectations, and more importantly, the unemployment rate unexpectedly rose to 4.3%, triggering the so-called "Sam Rule". The core theory of the "Sam Rule" is that when the 3-month average of the unemployment rate is 0.5 percentage points higher than the 12-month low, it usually indicates that the economy is in a recession.

Triggering the economic recession indicator "Sam Rule" is like completely opening the Pandora's box of economic recession. Since the Federal Reserve economist Sam proposed the "Sam Rule", the accuracy of this indicator in judging economic recessions has been 100%. In the 11 US economic recessions since 1950, the "Sam Rule" has been confirmed in all cases.

This non-farm payroll report has significantly escalated market concerns about a US economic recession, leading to a sharp decline in global stock markets on August 5th, with the benchmark index of the US stock market - the S&P 500 index - plunging 3% on that day. This day is now referred to as "Black Monday 2024". This decline also temporarily pushed the index 8.5% below its historical high closing price.

However, since then, the stock market has rebounded significantly, with the S&P 500 index reclaiming up to 8% of its lost ground, just one step away from the historical high set in July.

Henry Allen, a stock market strategist from Deutsche Bank, stated in a research report on Monday, "From a market trading perspective, the recent turmoil appears to be very short-lived. In many ways, this sell-off is even shorter than the market volatility that followed the Silicon Valley Bank's bankruptcy at the speed of light in March 2023, with market volatility quickly soaring during the Silicon Valley Bank crisis and then calming down again."

"However, even though the market has stabilized, several negative catalysts that drove the sell-off have not disappeared. Global data is becoming increasingly weak, a decrease in inflation rates implies that monetary policy is actually tightening, geopolitical concerns are escalating, and we are entering a difficult period for the stock market seasonally," Allen added.

Deutsche Bank's view on this "seasonal difficult period" aligns with the perspective of the asset management giant Fidelity Investments. The global macro research director at Fidelity Investments stated that the US stock market is facing a seasonal difficult period, which is part of a larger narrative of the increasing duration of the cyclical bull market. The institution stated that the US stock market is currently in an unstable period of seasonal volatility, expected to last from August through the first half of October.

According to Allen, the strategist at Deutsche Bank, the sell-off was so short-lived due to several key reasons. Firstly, although the July non-farm payroll data and unemployment rate were much worse than expected, they did not reach levels typically consistent with a recession period. Secondly, subsequent data after the non-farm payroll report, such as retail sales and weekly initial jobless claims data, showed great resilience, alleviating concerns about the US economy Deutsche Bank also pointed out that Japanese monetary policy makers released dovish signals of possible pause in the rate hike process after the market turmoil, and the gradual easing of the yen carry trade closure storm is another major reason.

Deutsche Bank's Allen asked in the latest report: "Will this kind of sell-off happen again?" The strategist then pointed out the following negative factors or catalysts in the research report as possible triggers for a new round of selling in the US stock market:

"Stock valuations are still high by historical standards, and positions are too crowded. Our equity strategy colleagues point out that their total equity position indicator has risen again to moderately overweight (63rd percentile). Valuation indicators of traditional nature such as CAPE continue to remain high by historical standards."

"Global economic data is becoming increasingly weak. Although non-farm payrolls may not be in recession territory, there is no doubt that the US labor market is slowing down... More comprehensive data shows signs of slowing economic growth. For example, in the Eurozone, the composite PMI has declined in the past two months, currently at 50.2, barely in the expansion zone."

"Monetary policy is actually becoming tighter, with the effective federal funds rate recently reaching the highest level since 2007, while QT is still playing a role behind the scenes. Even if central banks keep rates unchanged, if inflation falls, it means that their policy settings are actually tightening."

"From a seasonal market perspective, we are about to enter a difficult period, and September has been a very bad month for the market in recent years. Late summer and September are often weak periods for market sentiment. In fact, the S&P 500 index has fallen in every September of the past 4 years, and 7 out of the past 10 years."

"Currently, the geopolitical tension remains very severe, and geopolitics continues to affect stock market valuations."

Deutsche Bank's Allen concluded: "The market has just experienced a turbulent autumn, but volatility has quickly subsided, with the VIX index closing below 15 points again on Friday. However, even though the intense volatility has passed, many drivers of selling have not completely disappeared."