Q4 Correction?: Warnings from Citigroup, HSBC and Morgan Stanley
Contributed Opinion

Source:

Danny Deadlock, founder of Microcap.com, cites evidence that the last quarter of 2017 could be troubled for financial markets.

Last week I had the following calendar reminder pop up from November 2015:

"According to Citigroup's chief US equity strategist Tobias Levkovich, stock prices will continue to rise well after the Federal Reserve begins lifting interest rates. The appeal of large U.S. stocks won't diminish until the Fed is "three or four" rate hikes into its tightening cycle—towards the end of next year. History has shown that stock markets don't peak until two years after the first increase of a monetary tightening cycle."

Here is the Fed rate hike pattern since 2015. You will note the "3" rate increases—the 4th is being debated in September (for serious consideration to implement in Q4).

deadlockfedreserve

Tobias Levkovich is a managing director and chief U.S. equity strategist for Citi Investment Research, and a member of Citi's Investment Strategy Committee. He is responsible for assessing the direction of the market, setting the firm's investment sector allocations and compiling its Recommended List.

I have tracked him closely since Q1/09 and he has been very accurate—his advice from November 2015 is not only important, but it times perfectly with insight that surfaced this week on Bloomberg:

"HSBC Holdings Plc, Citigroup Inc. and Morgan Stanley see mounting evidence that global markets are in the last stage of their rallies before a downturn in the business cycle. Analysts at the Wall Street behemoths cite signals including the breakdown of long-standing relationships between stocks, bonds and commodities as well as investors ignoring valuation fundamentals and data. It all means stock and credit markets are at risk of a painful drop."

deadlockdow

There are concerns over lagging inflation and the impact another rate hike could have, but many believe the Fed could still hike the interest rate in Q4—likely in December. The bank has been targeting 2% inflation since 2012, but inflation has only averaged 1.3%.

Some policymakers argue that delaying another rate hike could lead to an inflation "overshoot" and create financial problems that would be difficult to unwind. There is a lot of pressure on the Federal Reserve to "normalize" monetary policy and get $4 trillion in debt under better control.

The U.S. economy is performing well and unemployment is around 4%. That could be enough to justify a rate hike, and if we see one (or a solid indication of one), it could be enough to justify a solid stock market correction—in particular, when this would coincide with the warnings I noted above.

Also note that in Q4 we will be dealing with issues in the European Union and the need for Congress to raise the U.S. Treasury debt limit and pass a budget (to prevent a government shutdown). In the past, this debt ceiling issue has deeply concerned the stock market.

Danny Deadlock is the founder and publisher of Microcap.com. He has over 30 years of experience with Canadian microcap companies listed on the TSX and TSX Venture Exchange.

Want to read more Streetwise Reports articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent articles and interviews with industry analysts and commentators, visit our Streetwise Interviews page.

Disclosure:
1) Statements and opinions expressed are the opinions of Danny Deadlock and not of Streetwise Reports or its officers. Danny Deadlock is wholly responsible for the validity of the statements. Streetwise Reports was not involved in any aspect of the article preparation or editing so the author could speak independently about the sector. The author was not paid by Streetwise Reports LLC for this article. Streetwise Reports was not paid by the author to publish or syndicate this article.
2) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.

Charts courtesy of Danny Deadlock

The Silver and Gold Summit

Get Our Streetwise Reports Newsletter Free

A valid email address is required to subscribe