You are currently viewing The red flag that preceded a halving of global stocks in 2000 and 2007 is back, warns Citi

The red flag that preceded a halving of global stocks in 2000 and 2007 is back, warns Citi

We are one day away from data that could be a turning point for the markets.

If Wednesday’s CPI fails to show a slowdown in prices, expectations will rise for a bigger Fed rate hike in September, which could send stocks tumbling. But if it swings the other way, especially after surprisingly good jobs data, the view that things aren’t as bad as expected/Fed hikes may be coming soon, may prevail. .

Wall Street seems to be having a hard time lately advising to tread carefully with the optimism that has the S&P 500 SPX,
-0.42%
is expected to break two straight quarters of losses – up 9.3% in the third quarter so far.

“The main challenge to the idea that there will be a more meaningful pivot from the Fed is that the near-term inflation picture should remain uncomfortably high,” Goldman Sachs strategists Dominic Wilson and Vicki Chang said in a note Monday night.

But amid the caution, there are still plenty of stock buy recommendations from the sell side, i.e. brokerages and investment banks. And that’s a big red flag that investors might want to pay attention to, warns our call of the day of Citigroup.

“Our global sell-side recommendations index has returned to the bullish levels reached in 2000 and 2007, after which global equities halved,” noted a team led by chief global equity strategist Robert Buckland.

“Analysts are net buyers of all sectors in all regions, but they generally are,” he said, noting a specific focus on US and emerging markets. “They are still bullish on cyclical sectors, suggesting little fear of an impending global recession.”

Citi calculates its Global Sell Calls Index by aggregating those of all stocks in the MSCI indices, ranging from 5, a strong buy, to 1, a strong sell. Their index is greater than three almost everywhere. They note that analysts are never net sellers of their stocks, even in bear markets. While it looks like analysts are getting more optimistic as stocks rise, it could also be that “the market is going up because they’re getting more optimistic.”

Citi Research, FactSet

In any case, this “analyst breeding” triggered a red flag in Citi’s bear market checklist, which rose to 6 out of a potential 18 flags. Note that this particular flag gave a false sell signal in 2012, when global stocks were flat for the next 12 months. But still, what happened in 2000 and 2007 is worth noting, they say.

Buckland and the team say analysts tend to get it wrong at the start of bear markets, turning even more bullish when they should be increasingly cautious. “Even though they start to revise their earnings forecasts down, falling stock prices and falling valuations keep them positive. They eventually become more cautious as earnings forecasts fall further, but that’s is a slow process.

The steps

US stocks DJIA,
-0.18%

SPX,
-0.42%

COMP,
-1.19%
are down as investors await Wednesday’s data. The DXY dollar,
-0.00%
is down, Treasury reports TMUBMUSD10Y,
2.793%
are rising and CL.1 oil prices,
-0.12%

BRN00,
-0.04%
are also higher. SXXP European Stocks,
-0.67%
are slow and bitcoin BTCUSD,
-0.38%
hovers at just under $24,000.

The buzz

Take-Two TWO,
-3.78%
Shares tumble after the video game maker revised its outlook down Monday night.

Novavax shares NVAX,
-29.64%
are down 30% after the vaccine maker cut its sales forecast in half.

Micron Technology MU memory chip group,
-3.74%
warned on revenue and separately said it would make a $40 billion investment and create up to 40,000 jobs in the United States. The White House is hosting a signing ceremony for the CHIPS Act on Tuesday, which aims to encourage domestic production of microchips. Elsewhere, technology group Avaya AVYA,
-45.53%
is sinking on a loss in the third quarter.

ARK Invest’s Cathie Wood told Bloomberg that she sold Coinbase COIN shares,
-10.55%
due to uncertainty on an SEC probe.

JPMorgan strategist and stoic bull Marko Kolanovic suggested investors cut some stocks and claw back commodities as recession fears subsided.

The FBI raided President Donald Trump’s home in Mar-a-Lago, apparently looking for classified documents. Some Republican lawmakers are outraged.

US labor costs rose 10.8% in the second quarter, while productivity fell 4.6%.

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