The stock market's 'summer of love' gave way to selling—but it's not the end of the affair

startling and dramatic market selloff has sparked a number of questions: Namely, what caused it, how long it could last, and whether it signifies that an improbable rally that’s defied the coronavirus pandemic could be nearing its end. 

After a brisk summer rally, last week’s bout of risk aversion was enough to drive the S&P 500 Index to its worst single-day drop in nearly three months, and sent the technology-laced Nasdaq reeling by over 4%. 

economic data continuing to surprise to the upside.

“We view the latest sell-off as a bout of profit-taking after a strong run,” UBS Global Wealth Management’s chief investment officer Mark Haefele said last week.

“Stocks are still well-supported by a combination of [Federal Reserve] liquidity, attractive equity risk premiums, and an ongoing recovery as economies reopen from the lockdowns,” he added. 

traditionally bad month for the market. 

“It felt like the Summer of Love in 1969 in the stock market, everyone was just piling in and it looked overvalued to us,” Bannister told “On the Move” last week. “So we’re taking off some of the froth right here.”

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FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), Google (GOOG) and Tesla (TSLA), among the primary beneficiaries of the pandemic trade, are now off sharply from their highs.

“Nifty 50” stocks of the 1960s and 70s that were favored by large investors, Bannister added that the FAANG cohort are “great companies at too great a price,” even though the current move is largely reflective of a “healthy correction.”” data-reactid=”39″>Drawing a comparison to the “Nifty 50” stocks of the 1960s and 70s that were favored by large investors, Bannister added that the FAANG cohort are “great companies at too great a price,” even though the current move is largely reflective of a “healthy correction.”

Analysts pointed to several mitigating factors that suggest the market’s move last week was far more benign than it appeared in real time. One critical plank of support comes from the Fed, which has telegraphed in no uncertain terms that it intends to keep the money spigot wide open until the coronavirus crisis has passed.

“From here, we remain constructive in our asset allocation although we acknowledge the risk of corrections remains elevated,” Goldman Sachs wrote over the weekend.

“Our equity strategists expect the current bull market to continue as the improved growth outlook coupled with supportive monetary policies should maintain the search for yield elevated and foster a compression” of equity risk premiums, the firm added. 

TNX) and the dollar (DX=F)— the latter actually falling against several risk-sensitive emerging market currencies like the South African rand and Mexican peso.

“That is in sharp contrast to both the Q1 market collapse and the smaller correction in early June, when equity market falls were part of a much wider pattern of risk aversion,” wrote Goltermann.

Seemingly impenetrable tech stocks — which have led the current rally, have sparked fears of a new bubble. Yet Goltermann argued that while that segment appears a “bit frothy” in the wake of a nearly 80% surge since mid-March, the situation is far more sustainable than 20 years ago.

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