Need to Know: The red flag that preceded a halving of global equities in 2000 and 2007 is back, warns Citi

3 mins read
Need to Know: The red flag that preceded a halving of global equities in 2000 and 2007 is back, warns Citi

We are a day away from data that could prove a turning point for markets.

If Wednesday’s CPI doesn’t reveal some slowing in prices, expectations will rise for a bigger Fed rate hike in September, possibly knocking stocks. But if it swings the other way, especially after surprisingly good jobs data, the view that things aren’t as bad as feared/Fed hikes may be done soon, could prevail.

Wall Street does seem to be at pains lately to advise treading carefully with optimism that has the S&P 500 SPX, -0.43% set to break two-straight quarters of losses — up 9.3% in the third quarter so far. “The central challenge to the notion that there will be a more meaningful Fed pivot is that the near-term inflation picture is likely to remain uncomfortably high,” said Goldman Sachs strategists Dominic Wilson and Vicki Chang in a late Monday note. But amid the caution, there’s still plenty of stock buying recommendations out there from the sell side, that is the brokerages and investment banks. And that’s a fat red flag investors may want to heed, warns our call of the day from Citigroup. “Our index of global sell-side recommendations is back to peak bullishness 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 every sector in every region, but then they usually are,” he said, noting specific concentration on U.S. and emerging markets. “They are still bullish on cyclical sectors suggesting few fears of oncoming global recession.”Citi calculates its index of global sell-side calls by aggregating those on all stocks in MSCI indexes, ranging from 5, a strong buy, to 1, a strong sell. Their index is above three almost everywhere. They note that analysts are never net sellers of their stocks, even in the case of bear markets. While it seems analysts get more bullish as equities rise, it could also be that the “market rises because they are getting more bullish.”

Citi Research, FactSet

In any case, that “analyst herding” has triggered a red flag in Citi’s bear market checklist, which has eased to 6 from a potential 18 flags. Note, this particular flag gave a false sell signal in 2012, when global stocks were flat for the following 12 months. But still, what happened in 2000 and 2007 makes it worth noting they say. Buckland and the team say analysts tend to get the start of bear markets wrong, by turning even more bullish when they should be growing cautious. “Even though they are starting to revise down earnings forecasts, falling share prices and cheapening valuations keep them positive. They eventually do turn more cautious as earnings forecasts fall further, but it is a slow process.”

The markets

U.S. stocks DJIA, -0.09% SPX, -0.43% COMP, -1.33% are slipping lower, as investors await Wednesday’s data. The dollar DXY, -0.25% is down, Treasury yields TMUBMUSD10Y, 2.783% are up and oil prices CL.1, -0.46% BRN00, -0.19% are higher as well. Europe stocks SXXP, -0.67% are sluggish and bitcoin BTCUSD, -4.11% is hovering at just under $24,000.

The buzz

Take-Two TTWO, -2.86% shares are falling after the videogame publisher revised its outlook lower late Monday. Novavax shares NVAX, -29.71% are down 30% after the vaccine maker slashed its sales guidance in half. Memory-chip group Micron Technology MU, -5.48% warned on revenue, and separately said it’ll make a $40 billion investment and create up to 40,000 jobs in the U.S. The White House is holding a signing ceremony on Tuesday for the CHIPS Act that is meant to encourage domestic microchip production. Elsewhere, tech group Avaya AVYA, -37.54% is sinking on a third-quarter loss.ARK Invest’s Cathie Wood told Bloomberg she sold some Coinbase stock COIN, -9.52% owing to uncertainty over an SEC probe. JPMorgan strategist and stoic bull Marko Kolanovic has suggested investors trim some stockholdings and scoop up commodities due to easing recession fears.The FBI raided President Donald Trump’s Mar-a-Lago home, apparently looking for classified records. Some Republican lawmakers are outraged.U.S. labor costs rose 10.8% in the second quarter, while productivity fell 4.6%.

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Top tickers

These were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern:

Ticker Security name
GME, -8.76% GameStop
AMC, -8.68% AMC Entertainment
BBBY, -22.43% Bed Bath & Beyond
TSLA, -3.21% Tesla
NVAX, -29.71% Novavax
NVDA, -5.23% Nvidia
AAPL, +0.15% Apple
NIO, -5.16% NIO
TWTR, -0.28% Twitter
AMZN, -1.31% Amazon
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