Citi: Seven warnings signs for stocks in 2016
Wall Street has tamped down stock market expectations in 2016 for a variety of reasons.
Less accommodative monetary policy, slow growth and geopolitical concerns only get the ball rolling. There’s a whole slew of reasons why the year ahead may be only marginally better than the current malaise that is the 2015 equities picture.
Citigroup has been one of the more pessimistic forecasters, estimating that the economy has a 65 percent chance of veering into recession and expressing a generally muted view of conditions overall.
In a note to clients, Citi global strategist Jeremy Hale and others presented seven conditions total on why investors should be leery of stocks in the year ahead:
1. Margin pressure: Rising labor costs could cause compression on margins, the expansion of which has been the key fuel behind the nearly eight-year bull run.
2. Sentiment: A proprietary gauge Citi uses shows declining investor attitudes toward stocks, something that under normal circumstances can be viewed as a contrarian positive signal. Citi, though, said the yawning gap between sentiment and the level of the S&P 500 index is flashing a warning sign that prices aren’t sustainable.
3. Transports: The Dow Jones transportation index has been getting absolutely crushed, tumbling about 17 percent year to date even as the broader industrial average is off just 2.1 percent. The transports are down 6.3 percent in December alone. Aside from the obvious Dow Theory warning when the two averages don’t correlate, Citi believes the move is “perhaps indicative of investor anxiety over future U.S. growth prospects.”
4. Metals: Compare the direction of gold and palladium prices to the S&P 500 and you’ll get a pretty close correlation over time. That’s diverged “worryingly” of late, according to Citi, with the metals’ price diving while the stock market index has held its ground.
5. Credit spreads: Investment-grade bond prices are getting cheap again. A divergence earlier this year led to a 12 percent correction in stocks.
6. The earnings recession: While the third-quarter profit cycle wasn’t as bad as the 5 percent drop analysts had expected, earnings nonetheless declined 1.4 percent and are expected to drop 4.5 percent in the fourth quarter as part of a full-year 0.8 percent fall, according to S&P Capital IQ. On top of that, earnings expectations for the first quarter in 2016 have plunged as well, dropping from as high as 15.1 percent to the current 2.4 percent.
7. Follow the money: Citi points out that U.S.-focused equity funds have seen outflows equal to 3 percent of total assets under management. In dollar figures, that’s about $124 billion, according to Bank of America Merrill Lynch.
It’s worth nothing that despite its recent downbeat tone, Citi’s official position for U.S. equities in 2016 is a downgrade to “neutral,” with an S&P 500 price target of 2,200 that actually reflects about 7.5 percent upside from the current level.
In an earlier note, the firm said the downgrade is “in many respects an extension of what we’ve been doing for most of this year as richer and richer asset markets, against a global background of economic risks, have made us more cautious.”
Source: CNBC – Citi: Seven warnings signs for stocks in 2016
