Outside of an exogenous geopolitical event – which given the way the world is tilting is becoming an increasingly likely occurrence – BofAML believes a bear market case is strongly supported by the probability of an economic shock most likely be tied to credit where signs of stress are building the most.
There are four simple factors that suggest problems ahead…
1. Investors are starting to believe we’re “late cycle”
2. Growth expectations may now be back in positive territory for the next 12 months, but are still extremely low
3. There are signs of stress in the high yield market, with the distress ratio increasing recently
4. More companies in the S&P 500 are projected to lose money than those with negative EPS 12M ago.
Below we provide a snapshot of conditions today vs. prior S&P 500 peaks, to assess whether any economic or financial metrics suggest the end of the cycle is near.
Some signals are more worrisome than others: High Yield spreads are very elevated, and rail carloads are at levels typically seen preceding or during recessions. IPO and M&A activity are both above prior peaks, though IPO levels through the first quarter of 2016 have not been the lowest since 2009.
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