Equities have been trekking higher since April, but the rally is probably on its last leg, according to JPMorgan.
The Dow and broader U.S. stock market began their post-Memorial Day trading on a high, as investors rallied behind tentative signs that the economy is creeping back to life. But analysts at JPMorgan are cautioning investors not to ‘overstay their welcome’ because equities are about to sputter again.
Despite rebounding more than 30% off their bear-market lows, equities are about to face stiff resistance heading into summer. That’s the general takeaway of a new research note from JPMorgan, which cautioned investors to remain on the sidelines.
Investors should not overstay their welcome in the bounce, in our view, where we reiterate that it is likely to peter out as we enter summer.
JPMorgan argues that the lingering effects of government lockdown measures will prevent a full recovery in the so-called cyclical industries, whose revenues and profitability reflect the business cycle.
Some of the pent up demand will get exhausted soon. In addition, the labour market dislocation will not allow the consumer final demand to fully complete the recovery this year. This might lead to an inventory overhang down the line.
Despite the downbeat forecast, cyclical stocks are likely to outperform as economic indicators improve. The purchasing managers’ index (PMI)–a gauge of private-sector activity in the business and services sectors–is correlated with cyclical sector groups.
PMIs plunged to record lows during the pandemic, which means they’re poised to rebound as the economy emerges from lockdown.
There’s an adage on Wall Street that tells traders to walk away from the stock market entirely beginning in May. Historically, the period between May and November has been the worst six months of the year.
According to LPL Research, the May to November trading period produces an average return of just 1.5%. Interestingly, stocks have returned positive results during these worst months in seven of the past eight years.
Predicting the market’s trajectory this year will be difficult due to the unprecedented recession gripping the U.S. and global economies. The stock market has been surprisingly buoyant because of expectations the recovery will take a “V-shaped” path in the coming months. Banks and even the Federal Reserve say that’s impossible.
The economic outlook depends largely on how quickly employees can return to work. More than 38 million Americans have filed for first-time unemployment benefits in the last nine weeks. An additional 2.1 million filers are expected for the week ended May 23.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment advice from CCN.com.