Major Banks Warn of Impending Recession

There was a widely circulated Bloomberg article a couple of weeks ago, in which several major banks warned of an impending U.S. recession. Here is a quick summary of their assertions:

1. According to Andrew Sheets of Morgan Stanley, falling correlations are sending a warning sign. He sees falling correlations between stocks and currency, currency and rates, and commodities as troubling. Morgan Stanley sees correlations following to their lowest level in a decade. The problem with this, according to Sheets, is that investors are "pricing assets based on the risks specific to an individual security and industry," while ignoring macro drivers like falling manufacturing data. He thinks the breakdown within and between asset classes is a product of investors just "looking for excuses" to remain bullish.
2. Bank of America analysts warned that investors are ignoring signals in the earnings space. According to Bank of America, for the first time since the mid-2000s, companies that outperformed analysts’ profit and sales estimates across 11 sectors saw no upside boost from investors. They think the under-reaction is a late-cycle indicator, signaling that investors have already priced-in the gains.
3. Citigroup analysts see a potential bubble forming. They are concerned that spreads between risk-free Treasuries and other types of debt may widen in the coming months thanks to declining central-bank stimulus, and as investors fret over elevated corporate leverage (driving corporate yields higher). But, they also think stocks can rally further before reaching their late cycle peak that would push them into bear market. 

And these weren't the only bearish forecasts. Economists at Oxford Economics Ltd. and Societe Generale SA also issued warnings about corporate margins starting to weaken and they showed correlations to past business cycle troughs. All in all, the forecasts across these major players were gloomy, but not outright bearish.

I think there's still a bit more runway for this expansion yet. U.S. GDP was just reported at 3% for the second quarter, and corporate earnings rose nearly 10% in Q2 - a majority of which rose more than analysts expected. I also like to look at the Conference Board's Leading Economic Indicators (LEI) to see if there are any signs of weakening, and there haven't been - at least so far. There has not been a recession to date when the LEI was high and rising, and guess what - it's high and rising. 

I'm staying the course throughout the balance of 2017, and keeping a positive view.  

Contributor

Sergey Savastiouk|Expert

Sergey Savastiouk, Ph.D. has a degree in Applied Mathematics from Moscow University and has extensive experience as an entrepreneur, investor, manager, and mathematician. His professional expertise is in applied mathematics, mathematical modeling, system and pattern analysis, and software and hardware system integration. He has served as the CEO of several hi-tech start-up companies and nonprofit organizations, which has given him proven capabilities in business strategy for high-tech start-up companies, market assessment, company formation, team building, product development, marketing, and sales. He has published numerous articles in journals and magazines on related fields. As a retail investor, he spent 15 years developing his proprietary trading and quantitative algorithms (now Tickeron’s A.I.), which brought him significant returns in trading the stock market. His current work and goal in founding Tickeron is to bring professional, sophisticated stock market analysis capabilities to retail investors via an easy-to-use interface.