How to Profit Before the Bear Market Arrives: Citigroup

Investors have a narrow window of opportunity to cash in profits before a “full-on bear market” hits the global markets, according to one team of analysts on the Street and as reported by Business Insider. 

According to Citigroup, we are currently in the third phase of four periods that are standard for market cycles. This “late cycle” favors growth and momentum trades and has produced bubbles in the past. (For more, see also: 2 Dow Stocks for a Volatile Market.)

Market in Third of Four Phases, Before Bubble 

“Stock market bubbles burst. Dips should be sold not bought. More defensive and contrarian strategies deliver,” wrote a team of equity strategists led by Robert Buckland. 

To prepare for a bear market and potential U.S. recession, investors should go Overweight on Materials, IT and Health Care, and underweight on Consumer Discretionary, Utilities and Consumer Staples. Regionally, the investment bank recommends pulling out of markets including Japan and Australia, while going overweight on U.S. equities and equities in emerging markets, specifically in Korea, Taiwan, Russia and Brazil. In general, investors should be doubling down on growth stocks and procyclical stocks. 

What to Buy Before the Bear Arrives

Overweight
Materials
Technology
Health Care

Source: CNBC; Citigroup Quarterly Global Equity update

What to Sell Before the Bear Arrives

Underweight
Consumer Discretionary
Utilities
Consumer Staples

Source: CNBC; Citigroup Quarterly Global Equity update

“A flat or downward sloping U.S. curve has been a good predictor of previous recessions, EPS collapse and global equity bear market. A flat curve indicates that Fed policy is tight and likely to drive a slowdown in the economy,” wrote Citi. Citi recommends that investors most closely watch the U.S. yield curve and IG credit spreads. 

In a separate note outlined by Business Insider, analysts at Bank of America Merrill Lynch indicated that 14 out of 19 indicators that they watch to signal a bear market have now been triggered.

BofA noted that investors, particularly active fund managers, have been flocking toward low quality stocks with high levels of debt relative to the broader market. This outperformance of more expensive, large, low dividend yield and low quality stocks over high-quality stocks, with stronger profits, was the latest signal of a forthcoming bear market. 

In the seven most recent market cycles, when this threshold was passed, it took an average of 21 months for equities to peak, with returns averaging at 30% over that time. BofA estimates the third phase started in February 2018, and forecasts the S&P 500 to reach 3,000 by year end, reflecting a 7.3% upside from Monday afternoon. 

Not all see plenty of time to buy stocks, including Guggenheim Partners’ Scott Minerd, who recommends that investors sell now, highlighting potential downside from a global trade war. 

“Investors are just ignoring the consequences and what’s going to have to be done in terms of Federal Reserve policy to offset the inflationary pressure that’s going to come out of tariffs,” stated Minerd, the firm’s global chief investment officer, in an interview with CNBC. He expects investors to be hit with “cold water in the face” as some sort of correction occurs in September or October. (For more, see also: Tariffs to Hit These 4 Consumer Goods Stocks: GS.)

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