Sinister stocks pile up as the chances of a Wall Street recession are high

(Bloomberg) – Nine turbulent weeks and a correction of US stocks have left a thorny question to analysts. What does the market say about the economy?

And while few people see the irrefutable signs that investors are preparing to face a recession, it's a word that comes up more often as they search for a signal in chaos.

From the rise of defensive industries to sudden craze for companies that resist volatility, equities have acted in a way that foreshadowed a slowdown in growth in the past. This makes sense: the economy's earnings and corporate profits are expected to moderate in 2019 after the breakneck pace of this year.

Although this is the case, most of the charts that follow reflect the observations of analysts who do not consider the recession the most obvious conclusion. Many consider the sale to be healthy after ten years of earnings. But with the resurgence of the trade war and the willingness of the Federal Reserve to raise interest rates, the number of equity researchers who are at least willing to talk about it is on the rise.

"What's driving the sale? The idea that the market is seeing something we do not see," said Bruce McCain, chief investment strategist at KeyBank. The global economy is much weaker than we thought, which reinforces the concern that there are not too many places to hide. "

Momentum Scare

It does not take a degree in technical analysis to be concerned. More than US $ 3 trillion has been deducted from US equity values ​​since the end of September, a sell-off that drove the S & P 500 down 10% and technology stocks well above the US dollar threshold. correction.

To see how violent this has been, look at the number of stocks on which the once so robust price momentum of this year has been broken – those trading below their 200-day average. Support is exhausted, with only 37% of S & P 500 companies outperforming their long-term moving average.

At the same time, the graph shows how wrong it can be to take markets too seriously when looking for clues about the economy. While the preponderance of frozen stocks is high by historical standards, it has a recent precedent: 2016. No recession has followed this signal.

None come now, either, according to the people who are paid to anticipate such things. According to Bloomberg's US recession probability index, the chances of the US going into recession next year is 15%. While they see the economy slowing a little faster next year and in 2020, the median estimate of economists predicts economic growth of 2.6% over the next 12 months .

Economists have not always managed to predict contractions. A 2014 study by Prakash Loungani of the International Monetary Fund revealed that not one of the 49 recessions in the world in 2009 was predicted by the consensus of economists a year earlier. Loungani had previously reported that only two of the 60 recessions of the 1990s were anticipated one year in advance.

In one way or another, investors are worried. They are turning to defensive sectors that are doing better when the economy is in trouble. Utilities, the only sector to have increased since September, lagged the overall market for nine consecutive quarters.

Some investors are looking to shelter from stock market turmoil with moderate upside stocks, unlike their riskier brethren. Quiet actions offer little alpha when things are going well, but are supposed to shine in times of uncertainty. Those who are risk averse have been part of the Invesco S & P Low Volatility ETF and the fund has beaten the S & P since the start of the market rout at the end of September.

The performance gap between defensive and cyclical stocks suggests that investors are starting to fix their prices in a recession scenario, said JPMorgan strategists led by Dubravko Lakos-Bujas in a note this week. They consider that dislocation is excessive and incompatible with the fundamental context.

Societe Generale's strategists, including Roland Kaloyan, spoke of the word R in one of the most depressing equity outlooks ever published. They see the S & P close next year at 2400, a drop of 18% from its September record. Yet, even to their skeptical eyes, the threat of contraction is distant: from the beginning to the middle of 2020.

Stocks still report Treasury bonds more than 10 years old, but they are far from the most popular asset class. A recent study by the National Association of Active Investment Managers shows that the share of mutual funds in equities has fallen to 30.5%, the lowest since 2016. It does not help, virtually everything decreases. Treasury bills, commodities and corporate bonds are down for the year.

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