The sudden sell-off that triggered the stock market's steepest decline in two years may be a sign of more turbulence ahead, according to JPMorgan.
The bank's analysts believe the combination of slowing economic growth and the unwinding of the carry trade was too overwhelming for the market to absorb all at once.
However, since that event, the stock market has recovered all of its losses and is now buoyed by positive economic updates this week. This recovery has led many on Wall Street to dismiss the event as an overreaction to a temporary data anomaly.
"Many market participants are writing off the recent blowup of various crowded trades as a mere fluke or flash crash, but we view it as more of a preview of what's to come," JPMorgan analysts noted in a Thursday report.
The sell-off earlier this month coincided with a jump in US unemployment and intensified as the Japanese market plunged 12.4%—its biggest drop since 'Black Monday' in 1987. The unwinding of the yen carry trade emerged as the primary factor unsettling global equities.
For the past two years, investors had been borrowing yen at low rates in Japan, but they found themselves scrambling to sell off assets to meet margin calls after the Bank of Japan's unexpected rate hike.
While significant, the analysts suggest that carry trade concerns are unlikely to trigger future market volatility, as many investors, having been caught off-guard, may not rush back into the strategy.
"The carry trades could eventually pose a problem again, but with investors having suffered losses, not everyone will be keen to reestablish these trades, making it harder to reach previous highs," the analysts explained.
"Instead, we see the reemergence of growth risks as the most likely catalyst for future market disruptions," they added.
