{"id":6779,"date":"2017-09-04T14:44:52","date_gmt":"2017-09-04T18:44:52","guid":{"rendered":"https:\/\/www.zacksim.com\/?p=6779"},"modified":"2022-02-27T17:58:24","modified_gmt":"2022-02-27T17:58:24","slug":"banks-warn-impending-market-downturn","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/banks-warn-impending-market-downturn\/","title":{"rendered":"Banks Warn of Impending Market Downturn"},"content":{"rendered":"<p>Over the past two weeks or so, I\u2019ve had a few Zacks Investment Advisors and clients ask me about a recent <em>Bloomberg <\/em>article that alluded to an impending downturn in the economy and markets. The article cites reports published by Morgan Stanley, Citigroup, Bank of America, HSBC, and Societe Generale SA \u2013 all big players with established reputations in the field. It is understandable, then, why seeing the article may have put some investors on edge.<\/p>\n<p>I saw enough feedback on the article that I decided to make it the topic of this week\u2019s post. Before I dive into reviewing the perspectives outlined in the article and offering some of our own, it is worth reminding readers that Zacks Investment Management conducts all of its research and market forecasts <em>independently, <\/em>via our parent company Zacks Investment Research. As such, we do not place much weight (actually, no weight) in what other banks or research firms publish. The fact that the <em>Bloomberg <\/em>article cited mostly warnings about a downturn does not alter our outlook one bit. We use our own databases, software, and models to conduct completely unbiased research, which sets us apart from other wealth management firms and investment firms.<\/p>\n<p>With that, let\u2019s dive in. The first thing I\u2019d point out is that the <em>Bloomberg<\/em> article seemed to be a hodgepodge of potential warning signs, as opposed to being a full thesis issued by any one of the banks. In other words, I got the sense that these negative outlooks may have been cherry-picked from broader research notes, which may have potentially listed other neutralizing\/positive forces. If there were positive, off-setting forces mentioned in the banks\u2019 reports, the <em>Bloomberg <\/em>article did not mention them.<\/p>\n<p>Here are a few of the warning signs mentioned:<\/p>\n<ul>\n<li>Morgan Stanley is concerned that equities have become less correlated with currencies, and that currencies have become less correlated with interest rates and spreads. They are also concerned that everything has become less sensitive to oil.\n<ul>\n<li><em>My Take: This is a technical argument, not a fundamental one. There is no investing rulebook that says stocks should be tightly correlated with oil or currencies. Sometimes stocks correlate tightly with those factors, sometimes they don\u2019t. In my view, you cannot base an entire forecast just on this one technical factor alone.<\/em><\/li>\n<\/ul>\n<\/li>\n<li>Citigroup frets that markets are on the cusp of entering a late-cycle peak before entering a recession. They are watching spreads in the coming months and how they respond to the Fed\u2019s tightening, and they are also concerned about corporate leverage.\n<ul>\n<li><em>My Take: We actually agree and have been saying for some time that we see the market and economy as late-cycle, but that in-and-of-itself is not bearish. It just means we should expect slower growth rates and fairly measured upside potential, in our view. We have written before about watching spreads and corporate leverage, but do not see either as a \u2018flashing red\u2019 warning sign just yet.<\/em><\/li>\n<\/ul>\n<\/li>\n<li>Bank of America Merrill Lynch\u2019s thinks that investors are not paying attention to earnings, and Societe Generale SA warns that an economy with full employment and slowing momentum (the US) should expect a decline in profit margins.\n<ul>\n<li><em>My Take: Agreed on both counts, but I think it is premature to see this as a warning signal. Our expectation is for improved earnings and margins across the next 2-3 quarters, and perhaps beyond. If corporations essentially \u201cgrow into\u201d their valuations with improved earnings, it does not really make a huge difference in our view that the economy is growing at a muddle-through pace. <\/em><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><strong>Bottom Line for Investors<\/strong><\/p>\n<p>There were other warnings issued in the article, like slowing manufacturing data and investors mispricing risk due to too much optimism about stocks. But, most of these prognostications simply confirm something we have already been saying for some time \u2013 that we see the U.S. economy and this bull market in a maturing, late cycle phase. Being \u2018late cycle\u2019 is not the equivalent of being over, however. An economy can grow at a snail\u2019s pace for years before giving way to a recession, and I think the U.S. and the global economy are likely to do just that for the next 6-12 months. Our outlook remains positive.<\/p>\n<p>Now the question becomes, <em>&#8220;What should you as an investor do about this?&#8221;<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Over the past two weeks or so, I\u2019ve had a few Zacks Investment Advisors and clients ask me about a [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":4789,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-6779","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/6779","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=6779"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/6779\/revisions"}],"predecessor-version":[{"id":8954,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/6779\/revisions\/8954"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=6779"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=6779"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=6779"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}