Market analysts at some of the biggest banks on Wall Street say inconsistencies between stock, bond and commodity prices along with traders ignoring economic warnings are about to roil financial markets.
That’s according to a report out this week from Bloomberg:
“Equities have become less correlated with FX, FX has become less correlated with rates, and everything has become less sensitive to oil,” Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, wrote in a note published Tuesday.
His bank’s model shows assets across the world are the least correlated in almost a decade, even after U.S. stocks joined high-yield credit in a selloff triggered this month by President Donald Trump’s political standoff with North Korea and racial violence in Virginia.
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, and shrugging off broader drivers, such as the latest release of manufacturing data, the model shows. As traders look for excuses to stay bullish, traditional relationships within and between asset classes tend to break down.
“These low macro and micro correlations confirm the idea that we’re in a late-cycle environment, and it’s no accident that the last time we saw readings this low was 2005-07,” Sheets wrote. He recommends boosting allocations to U.S. stocks while reducing holdings of corporate debt, where consumer consumption and energy is more heavily represented.
Other big bank analysts similarly warned the paper that the rosy market activity investors are currently enjoying is more likely to be a sign of a coming bust than the beginning of a period of sustained economic improvement.
“The cycle of real corporate profits has turned enough to be a potential source of concern in the next four quarters … That, along with the most expensive equity valuations among major markets, should worry investors in U.S. stocks,”Oxford Economics Ltd. macro strategist Gaurav Saroliya told the paper.
And Citigroup analysts led by Robert Buckland said in a note obtained by Bloomberg: “Bubbles are common in these aging equity bull markets.”
If you’ve been following financial warnings from market watchers over the past several months, this isn’t the first warning you’ve seen that the current economic uptick isn’t likely to last.
If you haven’t, take a moment to catch up.
For information on how to best position yourself to weather a drastic market downturn, check out this eye-opening information and actionable advice for investors, savers and planners of all ages and income brackets.