U.S. Stock Strategists See `Overdue' Selloff as Short-Term

(Bloomberg) -- You may feel otherwise with Dow Jones Industrial Average futures trading in a thousand-point range overnight, but U.S. equities strategists say there’s no reason to panic, calling the week-long selloff “overdue.”

Declines in stocks appear unrelated to U.S. economic fundamentals, strategists say, despite rising bond yields and concerns that inflation and higher interest rates could hurt corporate profitability. While reluctant to call a bottom, most analysts see the market rebounding within a few months. Strong earnings growth and billions in planned share repurchases, both backed by corporate tax reforms, are likely to support equity prices, analysts said.

The Dow Jones fell as much as 2.3 percent at 9:35 a.m., to the lowest since November 27, before erasing losses. The Cboe Volatility Index climbed as much as 35 percent to top 50 for the first time since August 2015.

Citi, Tobias Levkovich

“The so-called Fear of Missing Out has shifted markedly to the Fear of Washing Out as the Dow Jones plunged more than 1500 points, reminding some observers of the ‘flash crash’ of 2010. While Citi’s Panic/Euphoria Model had begun warning of excessive ebullience back around Christmas last year, the rapid reaction of the past week may be overdone.”

“Drops of greater than 4% have a tendency to rebound but fundamentals may be needed to generate a pickup later this year.”

Fundstrat, Thomas J. Lee

“This sell-off is months overdue (we unfortunately anticipated this in 2017 and it did not happen) and extremely healthy, because it is not a response to worsening fundamentals. Rather, it’s a re-calibration of market levels to the risk of Fed and other central banks moving away from ‘easing’ to normalization. And by necessity, is accompanied by higher interest rates — another positive.”

“This massive VIX inversion could be a sign that the equity sell-off could see a short-term bottom. We do not necessarily feel this way, since the sell-off has only spanned six days and comes after a near record period of low market volatility.”

JPMorgan Chase, Dubravko Lakos-Bujas

“While it is hard to pinpoint the exact bottom of the current sell-off, we view this as an opportunity to start buying the dips. The latest selloff came after a sustained period of low volatility and declining short interest on the back of improving global growth, favorable macro environment and tax reform passage.”

“A market crash that turns out to be unrelated to U.S. economic fundamentals typically has very little effect on market performance 3- to 12-months out.”

Also notes that equity prices are likely to find support from an expected $700 million to $800 million in share buybacks alone this year, combined with 18 percent consensus earnings growth, cash repatriation and lower policy uncertainty.

RBC, Lori Calvasina

“We have not sensed panic among equity investors, but nervousness had been building for the past few weeks. Indeed, investors have highlighted the sharp rise in 10-Year Treasury yields (and its potential return to 3%, marking the end of structurally falling rates), wage growth (which could negatively impact profit margins), more aggressive Fed tightening than expected, stretched sentiment, expensive valuations and the potential for deceleration on leading economic indicators as significant points of concern. In retrospect, a pullback may have been overdue.”

“The S&P 500 has experienced one-day drops of 3 percent or more 15 times since 2010. These drops have often occurred in the context of choppy equity market conditions in the short term. But six months later, the index has been meaningfully higher the vast majority of the time, with a median gain of 12 percent.”

Wells Fargo, Christopher Harvey

“In the cash equities business, it wasn’t too unusual of a day. However, the action across our derivative trading desk was very different,” as clients sought to put “significant protection on the books” and unwind short volatility plays.

In equities, “we feel the worst is likely over but the washout is not complete.”

Goldman Sachs, Charles Himmelberg

“The speed of the moves in January seemed too far too fast compared with both our views and the news from the macro data. The current correction merely confirms those impressions.”

Morgan Stanley, Andrew Sheets

“While large one-day S&P drawdowns have historically been associated with higher-than-usual returns for equities and tighter spreads for credit in the subsequent 12 months, weakness tends to persist three- to six-months out.”

“What stands out is that realised volatility has tended to pick up across nearly all assets, and remains elevated over at least the subsequent 12 months after a drawdown episode.”

Principal Global Investors, Seema Shah

“While the origins of the selloff may have been down to concerns about rising inflation and re-pricing of central bank expectations, the magnitude of yesterday’s move was almost entirely driven by technicals. My view on positive fundamentals and the market outlook is unchanged: the underlying strength of the economy warrants further gains in risk assets. Investors should also keep in mind that periodic setbacks are likely during late-cycle stages - although bouts of volatility like the one we have just seen will severely test investors’ resolve.”

To contact the reporter on this story: Courtney Dentch in New York at cdentch1@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Chris Nagi

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