Not sure what to do after Monday's steep sell-off? A widely followed J.P. Morgan analyst says you should buy the dip.
"Rapid sell-offs, such as the one today, can also be followed by market bounce backs as liquidity gets exhausted by programmatic selling," said Marko Kolanovic, global head of quantitative and derivatives strategy at J.P. Morgan, said in a note Monday after the close.
"With next year P/E on the S&P 500 now below 16, further positive impacts of tax reform and stabilization of bond yields, … we think that the ongoing market sell-off ultimately presents a buying opportunity," Kolanovic said.
The shed 4.1 percent, marking its biggest one-day sell-off since August 2011. The Dow Jones industrial average pulled back 1,175.21 points. Both indexes erased their gains for 2018.
This pullback comes after a rip-roaring start to the year for stocks. The Dow and S&P 500 notched all-time highs as well as sharp gains for January.
But concerns of rising inflation have recently pushed interest rates to multi-year highs, sending jitters down Wall Street. Investors worried that higher inflation would lead the Federal Reserve to tighten monetary policy faster than the market expects. Those concerns sent stocks into their current tailspin.
The benchmark 10-year U.S. note yield reached 2.88 percent overnight, but dropped back to 2.7 percent as investors looked for shelter from the equity market's onslaught.
Despite all of this, "we want to point out the massive divergence between strong market fundamentals and equity price action over the past few days," Kolanovic said. "The large market decline over the past few days will likely draw fundamental investors and even trigger pension fund rebalances (those that rebalance on weight thresholds)."
"We also want to highlight a strong probability of policy makers stepping in to calm the market," he said.
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