Dow Jones Industrial Average (DJIA) futures dragged lower on Monday, extending last week’s bout of heavy selling. But investors shouldn’t expect a turnaround yet. In a note to clients, JP Morgan analyst John Normand said the downturn is only halfway through.
The good news, Normand argues, is that talks of a full-blown recession might be exaggerated.
“A recession is avoidable but recurring drawdowns are not… The message across all indicators is that this correction is about half complete, and should prove much shallower than last year’s” – John Normand, JP Morgan Chase.
Dow futures drop 100 points
Dow Jones Industrial Average (DJIA) futures fell at least 100 points in early trading Monday, setting the tone for another miserable week on the stock market.
The selloff was triggered by news that China has limited the scope of trade negotiations going into the crucial Washington DC meetings this week. Chinese Vice Premier Liu He said Beijing will not yield on two major sticking points – its industrial policy and government subsidies.
More stock market corrections inevitable
JP Morgan warned investors to brace for more downturns in the Dow Jones, especially as we go into the next stage of US-China trade talks. Normand said President Trump’s negotiating style has a volatile effect on the markets, pointing to his:
“Impulsiveness and the scope for miscalculation when wielding untested policy tools like tariffs, export bans and capital flow restrictions.”
But Normand is confident we won’t see a larger drawdown, the likes of which roiled the Dow and S&P 500 in late 2018.
Is the Dow overpriced?
Not everyone agrees with JP Morgan’s modest downturn expectations. Leuthold Weeden Capital Management sees a future where 30% is wiped off the S&P 500.
“Large-cap valuations are high, not in bubble territory, but if we do stumble into recession over the next year, which I think is likely, I think we’ll see below 2,000s on the S&P.”
Their calculations are based on the fact that the US stock market is trading at almost 20x its current income. That valuation isn’t unusual in a strong bull market, but the Dow and S&P are showing signs of slowing down. Both are back at levels seen two years ago.
As CCN reported, the stock market is trading at one of its highest levels in history. While this doesn’t mean a recession is imminent, it does limit the upside potential.