Is It Time to Buy Stocks Again? Why Citi Says Yes.

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It’s been a long slog this year for the plummeting stock market. Citigroup’s model that forecasts the chances that stocks will head into a bear market shows that the market looks like more of a buy right now. 

The

iShares MSCI ACWI exchange-traded fund
(ACWI) has dropped about 14% this year, and for the same reasons the

S&P 500
and

Dow Jones Industrial Average
have fallen as well: High inflation, made worse by commodity restrictions resulting from the Russia-Ukraine conflict, has hurt consumer demand; cost inflation has dented companies’ profit margins; central banks are tightening monetary policy to reduce inflation, moves that will further slow economic growth. 

These issues, which the market is still trying to come to terms with, have recently kept many on Wall Street from recommending stocks. Some market technicians, for instance, recently said the S&P 500 could fall another 10% or more even from its relatively low level. 

But the global equity strategists at Citi have a model, a “bear market checklist,” that currently says buying the market appears relatively safe right now. The model considers 18 subfactors within the broader categories of valuations, bond market indicters, investor sentiment, corporate decisions and financing, profitability, and balance sheets. When close to all 18 subfactors are flashing sell signals, it often means a bear market—defined as a 20% drop—is coming. Fortunately right now, only six of the 18 factors are flashing sell signals. “Our global Bear Market Checklist wants to buy this dip,” writes Robert Buckland, equity strategist at Citi. 

For reference, the current number of sell signals is well below previous readings that preceded bear markets. In March of 2000, 17.5 of the factors indicated a sell, just before a bear market. In October of 2007, 13 signals showed sell just before a bear market. 

Here’s a look at where the signals stand now. First, a few of the negative signals:

The first ominous sign is the yield curve. The 10-year Treasury yield is just 0.27 percentage points above the 2-year yield. That’s down from a 0.78 percentage point difference to start this year. The narrowing difference means that short-term yields have risen faster than longer-term yields. Currently, that reflects that higher inflation and interest rates today will damage economic demand.  

The other noteworthy sell signal is analyst stock recommendations, which are too bullish for the moment. In fact, aggregate 2022 analyst earnings per share expectations for companies on the MSCI ACWI ETF have risen 2.6% year-to-date, according to FactSet. That’s partly because companies have largely beaten profit forecasts to start the year, and the exact impact of higher rates and inflation on future sales is hard for company analysts to quantify at this stage. So earnings estimates, in time, could come down. 

But there are a host of other positive indicators, 12 of them to be exact. To be sure, the risks to the economy and earnings haven’t gone away, but they may be reflected in stock prices already. Meanwhile, data like improving flows of money into equity funds are signs that buyers are coming back into the market. 

At the very least, it makes some sense to buy a few shares of companies here and there. 

Write to Jacob Sonenshine at [email protected]