Analysts at a number of large banks are warning of an economic downturn. Their warnings are based on observations of various technical data, none of which look very rosy.
One of Morgan Stanley’s chief strategists has noted a breakdown in the correlation of the prices of various assets. Higher correlations tend to indicate bullish sentiment, as various asset prices move together in response to positive economic data such as increasing manufacturing output. The breakdown of correlation means that investors are pricing assets based on risks specific to individual assets and are ignoring broader indicators of economic output, a bearish sign. Those correlation numbers have now reached lows last seen right before the bursting of the housing bubble.
At Bank of America, analysts have noted that companies that have outperformed profit and sales estimates aren’t being rewarded by investors, indicating that those results were already priced into investors’ expectations. That’s the first time this has happened since the mid-2000’s, another sign that the current bubble may be fading.
The numbers just keep getting worse, as value added by nonfinancial companies, corporate profit margins, and various other indicators all show the economy to be in the late stages of the business cycle, with a recession just around the corner.
Keep that in mind the next time you hear anything about how “data dependent” the Federal Reserve is. Fed officials obviously aren’t paying attention to the same data that Wall Street analysts are, preferring to look at headline macro figures such as unemployment numbers, inflation, and GDP. That may explain why they can’t see the bubble they’ve created, and they won’t realize that the bubble’s bursting until it’s too late to do anything about it.