JP Morgan analysts think the coronavirus fears will soon blow over and Wall Street will rush back into stocks.
Dow Jones Industrial Average (DJIA) futures took a brutal plunge in the early hours of Monday morning, pointing to a disastrous stock market open. As the death toll from China’s coronaries extends to 81, some traders are anxious about the impact on the global economy.
But not everyone is hitting the sell button. JP Morgan told investors to stay calm and buy the dip in equities.
Past pandemics episodes didn’t lead to sustained selling, they tended to ultimately be buying opportunities.
Analysts at Renaissance Macro Research and National Securities issued similar notes to their clients. It suggests that, while retail investors panic, Wall Street is about to swoop in and buy the dip.
Dow futures contracts collapsed by more than 350 points on Monday. The drop was triggered by increased fears of China’s coronavirus and a rocket attack on the U.S. embassy in Iraq.
JP Morgan was the biggest name on Wall Street to highlight a buying opportunity, but National Securities chief market strategist Art Hogan was even more specific. Speaking to CNBC, he said the Dow could pull back 3-5%, triggered by Coronavirus fears and corporate earnings season.
My guess is… [if there is a stock market pullback] it’s going to happen right now. Next week when we have about a third of the S&P 500 reporting. We’re going to see the losers lose a whole lot more. So I think the index itself could probably pull back 3-5% and I think that would be perfectly healthy.
And if there is a decent retracement, Wall Street will start buying equities. The strategist said:
I think if we see a 3-5% pullback sometime in the first quarter, that’s going to find a lot of money.
Having exploded to all-time highs in 2020, the stock market is overdue a breather.
“Coming from all time highs is the key point. We’re entering earnings season, stocks are priced for perfection. You tend to have a bit of an overreaction to bad new or ‘in line’ news when that happens” – Hogan.
The big question is whether it’s a sustained sell-off or a temporary pullback. JP Morgan believes it’s the latter, pointing to an over-demand for safe havens. In other words, traders have over-reacted to bad news.
This is the latest risk of a series that have driven U.S. Treasury yields far below what fundamentals indicate.
That money will likely shift back to equities when the coronavirus risk dissipates. As Jeff deGraaf of Renaissance Macro Research explains, this is a panic moment for the Dow Jones that will likely correct itself.
We’ve seen outbreak panics in the past and the resulting fear-based moves in the market have been buying opportunities.
This article was edited by Samburaj Das.