The three-day correction in U.S. stocks that has trimmed more than $4 trillion in value from global portfolios isn't likely the start of a broader bear market, according to Bank of American Merrill Lynch, but aftershocks from the enhanced volatility are still likely to disrupt trading in the near term.
BAML argued Wednesday, as many on Wall Street have said, that the unwinding of leveraged bets against market volatility had exaggerated Tuesday's market moves and three-day decline that's clipped more than 8% from U.S. benchmarks, but noted that the moves were better described as an "unwind of very overbought conditions" that should be steadied by solid underlying fundamentals and a placid Federal Reserve.
"While we were short term cautious we said we remained positive on the outlook for 2018 as a whole," BAML wrote in its weekly Global Cross Asset Strategy client note. "On a one to two week view it is difficult to know whether to buy the equity market but on a six month view we see this as a good entry point. Global growth is still robust, our global wave has been rising for 20 months in a row and earnings revisions are solid. That is a backdrop where global equity markets should do well and we continue to look for double digit returns for 2018."
BAML said the Fed is "unlikely to be concerned about 3% average hourly earnings growth" and noted that "inflation elsewhere remains tepid". The bank also argued that, even with a recent move in bond markets that has taken 10-year Treasury yields for a four-year high of 2.885% last week, fixed income markets are set up for an economy that is going to see deeper wage growth and further consumer price pressures in the near term.
"We remain of the view that this is a healthy correction and it may take a little more time for markets to settle and find a floor. Our assessment of fundamentals remains very positive and this is a dip we look to buy," BAML said.