“With investors currently very overweight cash, both equities and bonds should find support into the second half of the year,” said Nikolaos Panigirtzoglou, a London-based strategist at JPMorgan.
That should be a help after what’s been a rough year for both asset classes. The S&P 500
has dropped 21% this year, and the S&P U.S. government bond index has dropped 9%.
Leveraged investors appear to have retrenched abruptly last week, said Panigirtzoglou, judging by its estimate for S&P 500 index mini futures positions. “Our S&P 500 futures position proxy suggests that almost all of the previous post-pandemic position build up in S&P 500 futures has been unwound this year,” he said.
Panigirtzoglou also examined the performance of stocks and earnings during the past 11 recessions. The median price decline peak-to-trough in the S&P 500 is 22%, and the earnings per share decline is 17%. In what he calls mild recessions — based on whether earnings fell by more or less than the median in the past 11 U.S. recessions — the S&P 500 price decline peak-to-trough is 18% and the EPS decline is 9%, compared to the 33% price drop and 24% earnings fall in deep recessions.
“While a mild recession seems to be already embedded in this year’s equity market declines, a deep recession is not yet in the price,” he said.