Current recession probability is highest since GFC. In last 50y, probability has never got to this level without economy going into recession.

3 Major Warning Signs May Mean Danger Ahead for the Stock Market

FAANG has died

Despite ongoing low interest rates from the Fed, investors are no longer leveraging up on that cheap money to buy the once popular — always insanely valued — FAANG stocks. Facebook (FB), Amazon (AMZN) and Netflix (NFLX) have shed an average of 15.6% over the past three months, grossly underperforming the Nasdaq Composite (down 1.4%), S&P 500 (down 1%) and Dow Jones Industrial Average (down 1%).

The NYSE FANG+ Index (^NYFANG) — which includes the performance of other hot momentum tech names such as Tesla (TSLA) and Nvidia (NVDA) — has flat-lined over the past three months.

Apple (AAPL) and Alphabet (GOOG) have been the saving grace for FAANG investors — up 13.5% and 8.5% in three months, respectively, likely due to each’s more defensive properties compared to their peers in the investing acronym.

Instead, investors continue to be upbeat on defensive stocks across the health care and consumer staple complexes. Investors appear to appreciate the dividend yields (especially stacked up against the low 10-year Treasury yield) and relative operational stability of defensives than the FAANG momentum trades.

“Investors we speak to are not yet willing to rotate towards cyclicals and away from secular growth and the defensive areas. The rotation has been made increasingly more difficult due to the weaker economic data,” strategists at Jefferies wrote in a note to clients.

Telling as to the future direction of stocks and the U.S. economy, no?

Recession risk climbs

Recession talk on Wall Street has begun to resurface after going quiet during the market’s September rally. A few bad manufacturing and consumer confidence prints and a renewed downtrend in the safe-haven 10-year Treasury yield will do that, after all.

The risk of a recession has now spiked noticeably in one closely watched market gauge. The New York Fed’s recession probability index — which uses the yield curve to create its output — puts the chances of a U.S. recession within the next 12 months at about 40%. That marks the highest level of the bull market that kicked off in 2009.

Dow Transports continue to suck wind

The Dow Jones Transportation Average Index (^DJT) is often used as a proxy on the health of the global economy. Weakness in the transports — comprised of the railroads and airlines and the like — often suggests market participants are losing confidence in the global economic outlook.

And if this old school market indicator is right, then the U.S. economy will be barely growing in the first half of 2020 and stocks deserve a haircut right now. The Dow Transports have fallen about 8% in the past six months — 4% in the last three months alone — and have obviously lagged the broader market indices.

 

 

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