Citi's quantitative strategists have turned bearish on U.S. equities, cutting their portfolio recommendation to a 5% underweight from a prior 4% overweight and calling for a small short position in U.S. stocks. The team, led by Alex Saunders, says tightening financial conditions and slowing economic surprises echo the late 1970s, a view at odds with Citi's own equity strategy desk.
Citi's quantitative strategists have moved to recommend being 5% underweight on stocks in a portfolio, down from a previous 4% overweight. The team, led by Alex Saunders, is also calling for a small short position in U.S. stocks while preferring emerging-market equities.
Late-cycle signals flash
The strategists say their macro regime model is moving into late-cycle territory, pointing to tighter financial conditions. Treasury yields sit at two-decade highs, and the market is digesting a flurry of corporate bond issuance. Positive economic surprises are slowing at the same time, pushing the firm away from what had been a Goldilocks environment.
Echoes of the late 1970s
They compare the setup to the period before the Paul Volcker-led Federal Reserve hiked interest rates to quash inflation. That era was initially marked by stock market gains on resilient growth and decelerating inflation, before prices shifted higher and equities began falling. Iran was the geopolitical flash point then, with the Iranian Revolution, and the strategists note it is again now.
Trend-following strategies, which typically thrive in stagflationary environments, are coming off a strong month, the Citi team said. They base that partly on their own simulation of how such funds behave, and partly on data released this week from hedge fund tracker HFR, which confirmed a strong September for commodity trading advisers.
Wall Street split on the outlook
The Citi warning clashes with the rest of Wall Street — and with other parts of Citi itself. The bank's U.S. equity strategy team holds a year-end S&P 500 target of 8,100 and expects a dovish shift at the Fed. According to MarketWatch: "8,100 target has always been premised on soft landing", said Scott Chronert, head of equity strategy, this week.
The S&P 500 closed at 7,765 on Thursday, ending less than 1% away from a record high. The Nasdaq Composite has gained 17% this year.
Source: MarketWatch
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