DWS: Technical bear market has not yet occurred, pay close attention to the risk of market volatility.

Earlier this week, DWS Global Chief Investment Officer Bjorn Jesch noted that the S&P 500 index had fallen about 7 per cent from its recent high. According to DWS’s base-case economic and earnings forecasts, a technical bear market (a decline of 20 per cent or more, equivalent to a fall below 4,500) is still not expected. However, risks from recent market volatility, including forced selling by leveraged investors, will be monitored closely, along with indicators of systemic risk.

Bjorn Jesch said that markets were still volatile on Monday (May 5) after the sharp price swings over the weekend. The Japanese stock market suffered its worst one-day fall since 1987, with the yen’s rise being one of the main reasons. The VIX volatility index surged to more than 60 points, a record high since the onset of the Covid-19 pandemic in early 2020, within a few hours. The “Trump trade”, which has dominated market sentiment recently, has reversed, causing a sharp sell-off in US small caps, the US dollar and cryptocurrencies.

DWS expects the Fed to follow its established path, and not change course because of market panic. A 50-basis-point cut or an interim cut would be seen as a big policy reversal, and the Fed will be careful to avoid it. Instead, DWS’s base case remains that the Fed will start to move more gradually in September, with three 25-basis-point cuts over the next few months.

While a recession in the US is not DWS’s base case, it cannot be ruled out entirely. The bond market already reflects a very high probability of recession, with the yield on the US 10-year Treasury falling to 3.70 per cent. However, even if a recession were to occur, given the overall strength of the economy and the robust financial position of the private sector, it is expected to be a mild recession.