US stock investors may be a bit anxious these days.
After several months of sustained gains, the strong rally of the US stock market seems to have come to an abrupt end in July: since the S&P 500 index hit a historic high on July 16th, the index has begun to oscillate and decline, falling for four consecutive weeks on the weekly candlestick chart, with a cumulative decline of over 8%. The cumulative decline of the Nasdaq 100 index is even more than 10%.
The trend of the S&P 500 index from the beginning of the year to the present
On Wednesday Eastern Time, Savita Subramanian, head of equity and quantitative strategy at Bank of America, reassured the market that the recent sharp sell-off in the US stock market is just a "common technical adjustment" and is unlikely to turn into a comprehensive bear market, with no signs of the stock market peaking yet.
Is the US stock market just a technical adjustment?
Behind the decline in the US stock market, there are multiple factors driving it: the explosive July non farm payroll report in the United States, the withdrawal from yen arbitrage trading, and increased market concerns about a US economic recession.
Sabramanian believes that the performance of the US stock market in the past few weeks is not a trend of the stock market plummeting after reaching its peak, but more likely a typical adjustment that occurs on average every year. He pointed out that from the history of the US stock market, market corrections are very common.
A pullback of over 5% is common, occurring on average more than three times a year since 1930 (this is the second time this year after April). Larger adjustments are less frequent, but still common, occurring on average once a year of over 10% (the most recent being in the fall of 2023), "Subramanian wrote in the report.
The bond market remains stable
Sabramania also stressed that the US bond market remained stable, which was enough to convince him that the recent sell-off of US stocks was just a common correction, rather than the beginning of a real bear market.
Historically, during the period when panic turned into a bear market in the stock market, high-risk junk bonds would have a higher premium than US treasury bond bonds - but this has not yet become a reality.
The "BofA US high yield option adjusted spread", which measures the difference between the yields of junk bonds and US treasury bond bonds, is only 3.93% at present, far below the average level of 5.33% since the index was established in 1996. In contrast, during the stock market panic periods of 2020 and 2008, this price difference soared to 9.82% and 21.82%, respectively.
The recent widening of spreads can be described as a normalization of fair value from extremely tight levels. Our credit strategists believe that only when spreads widen above 450-475 basis points, is it enough to raise concerns
Most of the warning lights are not on either
In addition, Subramanian also tracked 10 signal indicators. Usually, when most of these ten signal indicators turn red, it indicates that the stock market has peaked.
But Subramanian wrote in the report that as of the end of July, only 3 out of these 10 signals had red lights on, which was even lower than the 5 lights on in June.
He said that this is far below the average level of seven red signals when the market peaked before.
Subramanian stated that; quot; Several market sentiment signals, including sell side indicators, indicate that market sentiment has not reached the overly optimistic level typically seen at the end of a bull market& amp;quot;
Sabramanian suggests that investors should not worry about the current sell-off lasting longer, but should buy on dips and focus on buying high-quality stocks.