JPMorgan Chase & Co. (NYSE:JPM) quant strategists warned that global equity prices could decline further despite the recent selloff.
Global equity allocations remain significantly above average levels, although there has been a noticeable pullback in recent weeks, the strategists said in a note to clients.
This retreat is attributed not only to falling equity prices but also to a surge in bond allocations. The current equity allocation stands at 46.5%, still well above the post-2015 average levels.
According to JPMorgan's calculations, for equity allocations to return to these average levels, equity prices would need to fall by another 8% from their current position.
"The cash allocation remains extremely low by historical standards posing vulnerability to both equities and bonds going forward," the analysts said.
Their latest analysis comes in the wake of last week's weak US payroll report and rising jobless claims, which have heightened concerns about a US recession.
Concurrently, the recent rate hike by the Bank of Japan (BoJ) has sparked fears of an unwinding of the Japanese yen carry trade, which has historically been utilized to fund asset purchases both in Japan and abroad.
The combination of these factors has led to a correction in risk assets, especially equities, while prompting a rally in traditionally safe assets such as government bonds, the yen, and the Swiss franc.
Despite this correction, there is little indication that equities have reached oversold levels as they did in October 2023 or October 2022.
Furthermore, quantitative momentum-driven investors, such as Commodity Trading Advisors (CTAs), have experienced substantial losses in recent weeks. These losses are a result of CTAs having to abandon their elevated long equity positions.
This unwinding has been one of the most severe since the Silicon Valley Bank crisis, erasing gains made earlier in the year.
For instance, the S&P's momentum signals, which were in extreme territory in mid-July, have since neutralized, indicating a severe unwinding of long positions. Similarly, the Nikkei index and other equity markets have experienced a marked reversal from long positions.