Masanari Takada, a strategist at Nomura, warned in a report this week that an “ominous pattern” is developing in market sentiment that could point to deep losses ahead.
Takada cited the sharp deterioration in an internal equity sentiment index, which is calculated by the Nomura macro and quant strategy teams and is based on unspecified market data. The recent swings in sentiment look like the ones experienced by the same index at the same point in 2008.
“The trend in US stock market sentiment is starting to resemble the pattern observed in the run-up to the Lehman crisis,” Takada wrote in the report.
Similar to 2007, US market confidence cratered late last year due to recession fears. The S&P 500 suffered its worst December since the Great Depression. US markets raced back to life in early 2019, driving a recovery in sentiment like the one that occurred in mid-2008.
Takada flagged points of similarity between the trend in sentiment now and before the Lehman collapse. Specifically, he pointed to the extent of the recent deterioration in market sentiment — and the timing of that decline.
“The correlation could turn out to be coincidental,” Takada said.
If it’s not a coincidence, he warned, then there is a risk of a “bear-squeeze rally” in US stocks from mid-June through early August followed by a “massive sell-off” late in the summer. Takada stressed that this is not Nomura’s “main scenario.”
And even a “massive” selloff doesn’t mean a return to the losses experienced in 2008, when fears of an economic depression caused a market meltdown.
The sudden escalation in trade tensions with China and Mexico sent another wave of fear through Wall Street last month. The Nasdaq dropped more than 10% from its record high, while the Dow suffered its first six-week losing streak since June 2011.
Analysts have warned that the trade tensions could have severe negative repercussions.
“The ongoing US/China trade war, and its recent escalation is threatening to send the global economy into recession,” analysts at Societe Generale wrote in a report on Wednesday. “Investors should buckle up.”
The bank urged clients to reduce exposure to “vulnerable” risky assets like stocks and instead plow money into government bonds.
Nervous investors have plowed money into US Treasuries, the ultimate safe haven asset. The yield on the 10-year Treasury briefly tumbled to 2.08% on Wednesday, down sharply from 2.5% at the end of April.
“While incoming data does not signal a recession, we believe investors will remain cautious as the pace of deterioration remains steep,” Jonathan Golub, chief US equity strategist at Credit Suisse, wrote in a note on Wednesday.
Golub urged clients to sell into market rallies “until signs of greater economic stability re-emerge.”
Will rate cuts help?
Wall Street is hoping that the Federal Reserve will come to the rescue by lowering interest rates.
The Dow spiked 512 points, or 2.1%, on Monday after Fed chief Jerome Powell delivered a speech that investors interpreted as a signal that he’s open to rate cuts.
Nomura’s Takada wasn’t swayed by the market rally.
While the stock market surged, Takada wrote in a Wednesday report that improvement in equity market sentiment has been “quite unremarkable.”
“Powell’s comments do not strike us as a game-changing development that could cause a significant improvement,” Takada wrote. “Sentiment still seems to be largely in line with similar events in the past.”
In other words, the 2008 comparison still holds.