Grim Stock Signals Piling Up as Wall Street Mulls Recession Odds
https://www.bloomberg.com/news/articles/2018-11-25/grim-stock-signals-piling-up-as-wall-street-mulls-recession-odds
Nine turbulent weeks and a correction in U.S. stocks have left analysts with a thorny question. What's the market saying about the economy?
And while few see incontrovertible signs investors are bracing for a recession, it's a word that's been coming up more as they seek a signal in the chaos.
From the ascent of defensive industries to the sudden craze for companies that resist volatility, stocks are acting in ways that have presaged slowing growth in the past. That makes sense: gains in the economy and corporate earnings are forecast to ease in 2019 from this year's torrid pace.
Befitting that, most of the charts that follow reflect observations by analysts who don't see a recession as the most obvious conclusion. Many view the sell-off as healthy after a 10-year run of gains. But with a trade war flaring and the Federal Reserve set to boost interest rates again, the number of stock researchers who are at least willing to mention the possibility is rising.
"What's driving the sell-off? The idea that the market sees something that we don't," said Bruce McCain, chief investment strategist at KeyBank. "That global growth and the global economy are much weaker than you would've thought otherwise reinforces concern that there aren't too many places to hide."
Momentum Scare
It doesn't take a degree in technical analysis to be concerned. More than $3 trillion has been lopped from U.S. equity values since late September, a sell-off that has driven the S&P 500 down 10 percent and tech stocks well past the threshold for a correction.
To see how violent it's been, look at the number of stocks where this year's once-robust price momentum has come asunder -- those trading below their 200-day average. Support is wearing thin, with just 37 percent of S&P 500 companies exceeding their long-term moving mean.
At the same time, the chart is an illustration of how it can be a mistake to take markets too seriously when looking for clues about the economy. While the preponderance of stalled stocks is high by historical standards, it does have a recent precedent: 2016. No recession followed that signal.
None is coming now, either, according to the people who are paid to anticipate such things. Odds the U.S. will fall into a recession in the next year stands at 15 percent, according to Bloomberg's U.S. Recession Probability Forecast index. While they see the economy losing a bit of speed next year and in 2020, the median estimate of economists calls for 2.6 percent economic growth in the next 12 months.
Economists haven't always done a great job predicting contractions. A 2014 study by the International Monetary Fund's Prakash Loungani found that not one of 49 recessions suffered around the world in 2009 had been predicted by the consensus of economists a year earlier. Loungani previously reported that only two of the 60 recessions of the 1990s had been anticipated a year in advance.
One way or the other, investors are acting worried. They're rotating into defensive sectors that do better when the economy is in trouble. Utilities, the only sector that's risen since September, had trailed the broader market in nine consecutive quarters.
Some investors seek shelter from market turmoil in stocks with muted price swings as opposed to their riskier brethren. Tranquil equities offer little alpha when things are good, but are supposed to shine during times of uncertainty. Those with risk aversion have piled into the Invesco S&P Low Volatility ETF and the fund has beaten the S&P since the market rout started in late September.
The performance gap between defensive and cyclical stocks suggests that investors are starting to price in a recession-like scenario, JPMorgan strategists led by Dubravko Lakos-Bujas said in a note this week. They view the dislocation as overdone and inconsistent with the fundamental backdrop.
Societe Generale's strategists including Roland Kaloyan evoked the R word within one of the more depressing stock outlooks to be issued lately. They see the S&P closing next year at 2,400, an 18 percent decline from its September record. Still, even in their skeptical eyes, the threat of a contraction is a long way off: early to mid-2020.
Equities still yield more than 10-year Treasuries, but are far from being the most-loved asset class. A recent survey by the National Association of Active Investment Managers shows that mutual funds' equity exposure has fallen to 30.5 percent, the least since 2016. It isn't helping much -- practically everything is falling. Treasuries, raw materials and corporate bonds are all down for the year.
Where'd You Go?
Equity exposure reaches the lowest level since 2016 amid a 10% S&P drop
Source: National Association of Active Investment Managers
"Both equities and commodities are reflecting some of the fears of a global growth slowdown, so you're not seeing positive returns at all," said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance. "Meanwhile the Federal Reserve is raising interest rates for the next six months, if not longer, which is also causing fixed income to go down. Global slowdowns are weighing on credit. And that's giving investors no place to hide."
To be sure, the economic indicators that often precede recession -- yield curve inversion and rising unemployment -- are not flashing warning signs. The yield curve is flat but not inverted and the unemployment rate keeps falling, as opposed to rising when a recession approaches.
— With assistance by Lu Wang
-- via my feedly newsfeed
https://www.bloomberg.com/news/articles/2018-11-25/grim-stock-signals-piling-up-as-wall-street-mulls-recession-odds
And while few see incontrovertible signs investors are bracing for a recession, it's a word that's been coming up more as they seek a signal in the chaos.
From the ascent of defensive industries to the sudden craze for companies that resist volatility, stocks are acting in ways that have presaged slowing growth in the past. That makes sense: gains in the economy and corporate earnings are forecast to ease in 2019 from this year's torrid pace.
Befitting that, most of the charts that follow reflect observations by analysts who don't see a recession as the most obvious conclusion. Many view the sell-off as healthy after a 10-year run of gains. But with a trade war flaring and the Federal Reserve set to boost interest rates again, the number of stock researchers who are at least willing to mention the possibility is rising.
"What's driving the sell-off? The idea that the market sees something that we don't," said Bruce McCain, chief investment strategist at KeyBank. "That global growth and the global economy are much weaker than you would've thought otherwise reinforces concern that there aren't too many places to hide."
Momentum Scare
It doesn't take a degree in technical analysis to be concerned. More than $3 trillion has been lopped from U.S. equity values since late September, a sell-off that has driven the S&P 500 down 10 percent and tech stocks well past the threshold for a correction.
To see how violent it's been, look at the number of stocks where this year's once-robust price momentum has come asunder -- those trading below their 200-day average. Support is wearing thin, with just 37 percent of S&P 500 companies exceeding their long-term moving mean.
At the same time, the chart is an illustration of how it can be a mistake to take markets too seriously when looking for clues about the economy. While the preponderance of stalled stocks is high by historical standards, it does have a recent precedent: 2016. No recession followed that signal.
None is coming now, either, according to the people who are paid to anticipate such things. Odds the U.S. will fall into a recession in the next year stands at 15 percent, according to Bloomberg's U.S. Recession Probability Forecast index. While they see the economy losing a bit of speed next year and in 2020, the median estimate of economists calls for 2.6 percent economic growth in the next 12 months.
Economists haven't always done a great job predicting contractions. A 2014 study by the International Monetary Fund's Prakash Loungani found that not one of 49 recessions suffered around the world in 2009 had been predicted by the consensus of economists a year earlier. Loungani previously reported that only two of the 60 recessions of the 1990s had been anticipated a year in advance.
One way or the other, investors are acting worried. They're rotating into defensive sectors that do better when the economy is in trouble. Utilities, the only sector that's risen since September, had trailed the broader market in nine consecutive quarters.
Some investors seek shelter from market turmoil in stocks with muted price swings as opposed to their riskier brethren. Tranquil equities offer little alpha when things are good, but are supposed to shine during times of uncertainty. Those with risk aversion have piled into the Invesco S&P Low Volatility ETF and the fund has beaten the S&P since the market rout started in late September.
The performance gap between defensive and cyclical stocks suggests that investors are starting to price in a recession-like scenario, JPMorgan strategists led by Dubravko Lakos-Bujas said in a note this week. They view the dislocation as overdone and inconsistent with the fundamental backdrop.
Societe Generale's strategists including Roland Kaloyan evoked the R word within one of the more depressing stock outlooks to be issued lately. They see the S&P closing next year at 2,400, an 18 percent decline from its September record. Still, even in their skeptical eyes, the threat of a contraction is a long way off: early to mid-2020.
Equities still yield more than 10-year Treasuries, but are far from being the most-loved asset class. A recent survey by the National Association of Active Investment Managers shows that mutual funds' equity exposure has fallen to 30.5 percent, the least since 2016. It isn't helping much -- practically everything is falling. Treasuries, raw materials and corporate bonds are all down for the year.
Where'd You Go?
Equity exposure reaches the lowest level since 2016 amid a 10% S&P drop
Source: National Association of Active Investment Managers
"Both equities and commodities are reflecting some of the fears of a global growth slowdown, so you're not seeing positive returns at all," said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance. "Meanwhile the Federal Reserve is raising interest rates for the next six months, if not longer, which is also causing fixed income to go down. Global slowdowns are weighing on credit. And that's giving investors no place to hide."
To be sure, the economic indicators that often precede recession -- yield curve inversion and rising unemployment -- are not flashing warning signs. The yield curve is flat but not inverted and the unemployment rate keeps falling, as opposed to rising when a recession approaches.
— With assistance by Lu Wang
-- via my feedly newsfeed
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