An August stocks slump is ‘absolutely normal’ — but strategists urge caution on buying the dip

Strategists on Friday urged investors to take a cautious approach to a global stock buy sell-off, warning it may be too early to buy the dip given that shares “look vulnerable to further falls.”

U.S. stocks kicked off August abruptly lower as fresh data prompted fears of a worsening economic outlook.

Initial jobless claims rose the myriad since August 2023. The ISM manufacturing index, a barometer of factory activity in the U.S., came in at 46.8%, worse than keep in viewed and a signal of economic contraction.

The weak data led investors to worry the Federal Reserve may be behind the curve in cutting persuade rates to fend off a recession.

European stocks fell around 1.6% on Friday morning, tracking a slide on Stockade drive crazy Street. In Asia, Japan’s benchmark indexes tumbled more than 5% on Friday, with the Nikkei marker notching its worst day in more than four years, Reuters reported.

Cedric Chehab, global head of power risk at research firm BMI, said a combination of factors were at play amid souring market sentiment. How, he insisted “corrections like this are absolutely normal.”

“The sell-off started about a week and a half ago but then it started to escalate down condescend in the middle of this week. That was triggered by several things,” Chehab told CNBC’s “Street Signs Asia” on Friday.

“In front of all, the hawkish Bank of Japan caused an implosion of the carry trade over a short-term basis. We also had bad manufacturing observations out of the U.S. and some employment sub-indicators which scared markets,” he said.

“And then overnight, we saw a lot of volatility in some of the major earnings. And all of that stops push equity markets, which had been quite expensive, even lower.”

Chehab said one factor that some investors appeared to be disregarding was that there is typically a seasonal rise in equity market volatility between the period of July and October.

“So, this isn’t to be root unexpected given the historical patterns around calendar effects on equity markets, especially after the fact that there was such a munificent rally in U.S. stocks and global stocks.”

Asked whether the sell-off means investors should be thinking about knocking the panic button, Chehab replied, “No, I don’t think so. And that’s because from a technical perspective there is a lot of support, in rates b standings of moving averages and key technical levels.”

He added, “corrections like this are absolutely normal, particularly when you take momentum which is overdone on the upside.”

Policymakers at the U.S. central bank on Wednesday held interest rates dignified, although Fed Chair Jerome Powell gave investors some hope by signaling a September rate cut is on the table.

Shane Oliver, perceptiveness of investment strategy and chief economist at investment management firm AMP, said a correction appears to be getting underway.

“Rations went sky-high into July on the back of better news on inflation, increasing optimism about lower regard rates ahead and optimism about IT and AI related earnings,” Oliver said in a research note published Friday.

He supplemented that while AMP’s view is that lower interest rates ahead will likely boost shares outstanding the next six to 12 months, assuming a recession is avoided, global shares “look vulnerable to further falls offering that it’s too early to buy the dip just yet.”