Wall Street banks are warning that a downturn in the stock market is coming.
HSBC Holdings Plc, Citigroup Inc. and Morgan Stanley see mounting evidence that the global stock market is in the last stage of their rallies. This will be followed by a downturn in the business cycle.
Analysts at the Wall Street behemoths cite several trading signals. These include the breakdown of long-standing relationships between stocks, bonds and commodities. In addition, investors are ignoring valuation fundamentals and data. It all means stock and credit markets are at risk of a painful drop.
Just like they did in the run-up to the 2007 crisis, investors are pricing assets based on the risks specific to an individual security and industry. They are ignoring broader drivers, such as the latest release of manufacturing data. Traders are looking for excuses to stay bullish. The traditional relationships within and between asset classes are breaking down.
“These low macro and micro correlations confirm the idea that we’re in a late-cycle environment. And it is no accident that the last time we saw readings this low was 2005-07.”