Three major Wall Street banks are now issuing warnings to investors that global markets are in the final stages of their rally, and an economic downturn will soon hit stocks everywhere.
HSBC Holdings Plc, Citigroup Inc. and Morgan Stanley see mounting evidence that global markets are in the last stage of their rallies before a downturn in the business cycle.
Analysts at the Wall Street behemoths cite signals including the breakdown of long-standing relationships between stocks, bonds and commodities as well as investors ignoring valuation fundamentals and data. It all means stock and credit markets are at risk of a painful drop.
“Equities have become less correlated with FX, FX has become less correlated with rates, and everything has become less sensitive to oil,” Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, wrote in a note published Tuesday.
Morgan Stanley’s model reportedly shows assets across the world are “the least correlated in almost a decade.” And, just as prior to the 2007 start of the Great Recession, investors are pricing assets based on the risks specific to an individual security and industry, and shrugging off broader drivers.
The report also states:
Oxford Economics Ltd. macro strategist Gaurav Saroliya points to another red flag for U.S. equity bulls. The gross value-added of non-financial companies after inflation—a measure of the value of goods after adjusting for the costs of production—is now negative on a year-on-year basis ...
The thinking goes that a classic late-cycle expansion—an economy with full employment and slowing momentum—tends to see a decline in corporate profit margins. The U.S. is in the mature stage of the cycle—80 percent of completion since the last trough—based on margin patterns going back to the 1950s.
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