Citi Says U.S. Stocks Pricing Recession More Than Any Other Asset
U.S. equities are pricing in the highest odds of a recession than any other asset class and may be poised for more losses.
(Bloomberg) -- US equities are pricing in the highest odds of a recession than any other asset class and may be poised for more losses, according to Citigroup Inc.’s quantitative strategists.
“US equities have priced the most (but not enough) recession risk, and earnings estimates have further to adjust,” strategists including Alex Saunders wrote in a note dated Oct. 18. “US bonds have priced the least risk, but it will take some time before bonds react to recession risks given the hawkish Fed.”
A Bloomberg survey of mainly Wall Street economists puts the probability of a recession in the coming year at 60%, up from 50% a month earlier. Although standard yield-curve probit models signal a 34% chance, according to Citi. Bloomberg Economics’ Eliza Winger and Anna Wong are more bearish, putting the chance of recession at 100% in the next 12 months.
Citigroup’s view gels with a similar verdict last month from a trading model created by JPMorgan Chase & Co. strategists. US equities have been hammered this year as signs of stubbornly high inflation and a hawkish Federal Reserve raise the specter of recession, even as President Joe Biden has said a downturn will be “very slight.”
After entering into a technical bear market in June, the S&P 500 benchmark has extended this year’s decline to 22% as of Tuesday’s close. Meanwhile, the US 10-year Treasury yields have climbed by more than 250 basis points this year.
No asset class is over pricing the recession risk but equities have factored that scenario the most, Saunders and the team wrote. “This time is unusual, as stubborn inflation has kept pressure on fixed income, which usually rallies as recession risks rise.”
They recommend investors to use trend-following as the main strategy now, saying it has done well during periods of slowdowns and stagflation.
Goldman Sachs Group Inc. also turned more defensive in its sector allocation on Tuesday, saying equities “do not currently reflect the risk of a US recession that many portfolio managers expect during the coming year.”
“Reasonably-valued defensives” include health care, staples, and telecommunication services companies, strategists including David J. Kostin wrote in a note dated Oct. 18.
Read: US Recession Risks Differ Across Wall Street: New Economy Daily
(Updates to add Goldman Sachs views in the final two paragraphs.)
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