MW Citi has a new theory about the economy - and says investors should pick stocks that can stand on their own

By Steve Goldstein

Citi strategists unveil 'no cycle' theory amid economic uncertainty

The start of the week saw a huge spike in Treasury yields clobber virtually all but the most important stock, Nvidia. Whether it's a one-day tantrum on fears about the government's deficit going to the moon remains to be seen, but maybe a heavy dose of corporate earnings can distract from that concern.

Since COVID it's been difficult for markets to figure out just where in the business cycle the economy is, and therefore what kind of stocks to pick. If the Federal Reserve interest rate cuts signal the economy is about to slow, if not fall into a recession, then typically high-quality stocks would be the place to go; if it's a sign actually that animal spirits are about to erupt again, then hard-hit small-caps and value stocks might make more sense.

Strategists at Citi have a new theory - the "no cycle," which is not to be confused with "no landing," the term which means an economy is not slowing down.

The Citi team by contrast point to a host of paradoxes in the economic data. The Conference Board's leading economic index for instance keeps pointing to a recession that hasn't happened, while the Federal Reserve's senior loan officer survey by contrast suggests lending standards have peaked and are now getting looser. The U.S. unemployment rate is low and payrolls have been healthy, but full-time jobs have shrunk. And on and on.

"Our economic system is still normalizing post [the] pandemic induced recession and ensuing supply chain disruption triggering inflation and the resultant Fed response. While inflation is now subsiding, price levels should remain higher than [previously], thus putting pressure on wage growth and levels going forward," say strategists led by Scott Chronert.

"In our view, no two economic, Fed, and/or market cycles are the same, and this one has its own peculiar dynamics at work," they add.

So what does that mean for the stock market? Well, it's complicated - the firm still likes the U.S. stock market. But the strategists are worried about earnings - "the bigger issue from here may be the ability for earnings growth to persist beyond the next year as fundamentals are set against the lingering impact of higher inflation-driven price levels even as an inflecting Fed plays out."

Okay, but which stocks? They like companies where there are positive trends on return on equity that are driven by operations instead of buybacks. The Citi strategists say these companies only have slight correlations to other factors like quality or value, and very little correlation to what's going on in the economy.

The firm has put together a hefty list of companies that meet that criteria, including Micron Technology $(MU)$, Western Digital $(WDC)$, Allstate $(ALL)$, Newmont $(NEM)$ and GE Vernova $(GEV)$. Netflix $(NFLX)$, Uber Technologies $(UBER)$ and Advanced Micro Devices $(AMD)$ also are on the list.

And Citi has identified the opposite, companies with negative return-on-equity trends due to fundamental deterioration, which includes Altria $(MO)$, MSCI $(MSCI)$, Airbnb $(ABNB)$, Veralto $(VLTO)$ and Waters $(WAT)$. Some big names including Broadcom $(AVGO)$, Microsoft $(MSFT)$ and Tesla $(TSLA)$ are also among the companies in the negative return-on-equity trends basket.

The market

U.S. stock index futures (ES00) (NQ00) were weaker early Tuesday. Gold (GC00) traded just below record levels. Bitcoin (BTCUSD) traded lower.

   Key asset performance                                                Last       5d      1m     YTD     1y 
   S&P 500                                                              5853.98    0.67%   2.11%  22.73%  37.82% 
   Nasdaq Composite                                                     18,540.00  1.23%   2.58%  23.51%  41.10% 
   10-year Treasury                                                     4.209      17.20   47.60  32.81   -61.71 
   Gold                                                                 2746.6     3.03%   3.51%  32.57%  38.42% 
   Oil                                                                  70.74      -1.57%  0.01%  -0.83%  -17.85% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

There's a big batch of earnings reports coming Tuesda from companies including General Motors $(GM)$, Verizon Communications $(VZ)$, 3M $(MMM.AU)$ and after the close, Texas Instruments $(TXN)$.

German software group SAP $(SAP)$ rallied after hiking its 2024 profit and cash flow outlook.

The International Monetary Fund releases its world economic outlook at 9 a.m. Eastern.

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The chart

The ultimate play on the U.S. election isn't even American. Per data from Barclays, volatility for the iShares MSCI Mexico ETF is elevated around the election. That's logical - separate data from Bank of America shows that Mexican stocks slumped 12% in the month after the 2016 election, worse than other assets including the 30-year Treasury, gold and clean energy stocks which also struggled.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   TSM     Taiwan Semiconductor Manufacturing 
   AAPL    Apple 
   DJT     Trump Media & Technology 
   NIO     Nio 
   GNPX    Genprex 
   PLTR    Palantir Technologies 
   AMZN    Amazon.com 

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-Steve Goldstein

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(END) Dow Jones Newswires

October 22, 2024 06:38 ET (10:38 GMT)

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