Goldman, Deutsche say US stock selloff may be close to an end

Bloomberg September 14 | Updated on September 14, 2020 Published on September 14, 2020

Volatility in stocks is likely to persist post US elections   -  REUTERS

Going ahead, the US elections is a key source of uncertainty for stock markets

The recent pullback in US stocks could be close to an end if history is a guide, according to strategists at Goldman Sachs Group Inc. and Deutsche Bank AG.

Its magnitude has matched a typical selloff in the S&P 500 since the financial crisis, albeit at a faster pace, wrote a team led by Goldman’s David Kostin in a note Friday. And options positioning — at the core of the weakness — has normalised, noted their counterparts at Deutsche including Srineel Jalagani the same day.

“Despite the sharp sell-off in the past week, we remain optimistic about the path of the US equity market in coming months,” wrote the Goldman strategists. Since the financial crisis, the typical S&P 500 pullback of 5 per cent or more has lasted for 20 trading days and extended by 7 per cent from peak to trough, matching the magnitude of the most recent pullback if not the speed.

A reassessment of historically high equity valuations and volatility in options markets has sent the the S&P 500 down about 7 per cent from its record close on September 2, though it remains almost 50 per cent above its March low. The Nasdaq 100 is off 11 per cent, after investors questioned whether a rally in the tech-heavy gauge might be too frothy.

Meanwhile, the Deutsche team focused on the impact of the options market, using a metric that looks at the number of bearish contracts relative to bullish ones. It had fallen to the bottom of its 10-year range — indicating an extreme level of positive sentiment — but after the correction has already recovered to about average levels, the team said.

Historically, corrections in the put-call ratio have tended to have sharp but short-lived market impacts, the strategists wrote.

Still, both teams pointed to the US elections as the key source of uncertainty for markets ahead.

Investors still have to contend with the upcoming macro event of the US presidential elections, the Deutsche strategists warned. With a likely unprecedented volume of mail-in ballots, prospects for volatility enduring post-election day are high.

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Published on September 14, 2020
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