Monday’s stock market sell-off that started last week stemmed from a disappointing July jobs report, which dampened hopes for a soft landing and increased fears of a potential recession in the US economy.
However, Oppenheimer strategists believe such a pullback can present opportunities to "catch babies tossed out with the bathwater.”
The negative sentiment arose from an employment gain of 114,000 jobs, significantly below the consensus estimate of 175,000. This led to a decline in both bond prices and major US equity benchmarks, which are now considered to be in over-bought and over-sold conditions, respectively.
Since the end of last year, the Federal Reserve has indicated its intention to cut rates, believing it can do so without sparking inflation. However, this message has not resonated with its skeptics.
"The sell-off that took place looked to us like the actions of a mix of bears—many of whom ironically had capitulated in droves throughout the first half of this year, nervous investors, and short-term traders who found catalyst as well in the reaction to the jobs number to take some profits without FOMO (fear of missing out),” Oppenheimer noted.
Several top-performing stocks this year bore the brunt of the selling pressure. The downturn also appeared to be a renewed attempt by Fed critics, particularly those favoring high leverage, to push the Fed towards a policy pivot, similar to previous successful efforts in Q4 2018 and Q1 2022.
Given the historical volatility of monthly jobs numbers, with frequent revisions, it is advisable not to jump to early conclusions, Oppenheimer noted.
Many market participants pointed out that factors such as the recent hurricane in Houston, the early release of the jobs report, and issues with data collection likely contributed to the messy data for July. Future revisions are expected to provide greater clarity, strategists said.
Looking ahead, market expectations for a Fed rate cut in September remain high, as reflected in the futures market. According to Oppenheimer, this expectation could add to volatility leading up to the September FOMC meeting.
With the Fed funds rate currently at 5.25–5.50%, policymakers have sufficient room to manage the ongoing economic transition despite criticisms.
Periods of transition, like the current one, can benefit various market participants, including short-term traders, options players, short sellers, and other segments focused on quick returns, strategists pointed out.
However, such volatility also creates unexpected opportunities for intermediate- and long-term investors. Those with a disciplined approach to dollar cost averaging and a commitment to diversification may find value in the "babies that get tossed out with the bathwater."