The stock market is 'trapped'
Robert Buckland and the global strategy team at Citi said it is unlikely for stocks to go anywhere in the foreseeable future.
"The Brexit vote has damaged the outlook for the global economy and EPS," wrote Buckland in a note to clients Wednesday."This is clearly unhelpful for global equities. It also drove global bond yields down to unprecedented levels, which has increased the relative income attractions of equities. These two opposing forces are likely to keep share prices trapped in the current trading range."
According to Buckland, looking at the market as it stands now, there is little reason to think that stocks are going to either collapse or see big gains any time soon.
"Income attractions, especially relative to bonds, provide a floor to global equities but lackluster EPS provide a cap to the upside," wrote Buckland "Our Bear Market Checklist tells us to buy the dips, but we would be wary of chasing the rallies."
Citi's Bear Market checklist consists of a series of 18 factors that would signal the beginning of a sustained stock market downturn. Included in this group are measures such as earnings per share valuations, the US Treasury yield curve, growth in the number of IPOs, and more.
At this point, the checklist has only 3 factors in dangerous "red" territory and one in cautious "yellow" territory, for a total score of 3.5 out of 18. By comparison, the checklist hit 17 of the 18 before the 2000 crash and 13.5 before the financial crisis sell-off.
"Our checklist helped us hold our nerve in 2011-12," said Buckland."It told us to do the same last August and this January. It is not a market-timing model. It will not tell us that there is another 15% correction in global equities coming. But it will tell us what to do when that correction occurs. Right now, it is still inclined to tell us to buy the next dip."
Additionally, said Buckland, the collapse in global bond yields has sent investors searching for some sort of income-creating investment. Investors will then seek out dividend paying stocks in order to supplement their income, which will support equity prices.
On the other hand, wrote Buckland, there is no catalyst to send equities much higher either. Economic growth looks lackluster, with areas such as Europe and China facing headwinds that could slow down their GDP expansion. Additionally, for individual companies, short-term effects such as collapsing prices of commodities and currency swings will likely weigh on earnings.
With nothing happening to make things get much better, and with little reason for the whole market to capitulate, Buckland's conclusion is to settle in and get used to where we are now.