Marcus Tuck

Following the traction Citi achieved with their Global Bear Market Checklist, which is based around the MSCI All Country World Index, Citi have introduced a similar Bear Market Checklist specifically for the US S&P 500 Index. It is built around the same framework of 20 key variables designed to help separate equity signal from noise. Depending on the strength of each warning signal, it is classified as either a "Caution" or "Danger" signal.

Sentiment can be one of the most powerful short-term influences, given the impact of human emotion. Citi's Panic/Euphoria Model is a useful tool to determine when the zeitgeist gets pulled excessively in either direction. Over the past 15 months, this gauge swung into Euphoria twice (January and September 2018), flagging market risk, and dropped into Panic (December 2018), triggering a buy indication. Current neutral readings are imprecise, but markets generally have an upward bias.

Earnings represent another crucial dynamic, although, at times, estimate revision trends may provide more insight than the absolute level of EPS. Street bottom-up 2019 consensus called for 12% S&P 500 profit growth last September and now has dipped to the 4%-5% range. Citi have maintained a 6% forecast for the past six months, believing that possible upside surprise potential exists, particularly in 1H19. Revision momentum may have some recovery potential in the US after being hammered since October.

Valuation remains a positive metric even as Citi find few "takers" buying into that view. The general concern revolves around the cyclically adjusted P/E (CAPE) or the notion that the multiple compresses as we near recessions. Yet, low inflation has supported P/E ratios of 18x on average in the past, and Citi's normalized earnings yield gap approach suggests a near 90% probability of gains in the next 12 months.

Credit conditions are another important element. The Fed's latest Senior Loan Officers' Survey was disappointing and makes Citi a bit worried about 2H19's economic progress even if the next data point may show improvement in May, as the traditional 9-month lead still argues for some sluggishness and earnings pressure later this year.

The signals from all 20 variables in Citi's US Equity Bear Market Checklist as at 7 March 2019 can be seen in the table below. There are no variables in the Danger zone and 4 in the Caution zone. The total score is not even close to worrisome levels. In 1990, 69% of the factors were highlighting risk, while in 2000, the number reached 89%. In 2007, it was 55%. Yet, the current 20% reading (4 Caution signals out of 20 variables) just does not suggest major problems in Citi's view.

That might strike many people as unbelievable (more noise than signal) but it is consistent with equity outflows, high cash weightings, low real interest rates, a more neutral policy stance by the Fed, and the general lack of bullish sentiment.

Citi's US Equity Bear Market Checklist


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Rosemary Breen

Thank you for sharing this Marcus; please keep us updated.