Buy Stocks On Big Sell-Offs, Says Citigroup

Stock prices have dropped well below their record highs, volatility is way up, and investors are increasingly nervous about the prospect of future corrections, if not the onset of a long-delayed bear market. To capitalize on this environment, equity strategists at Citigroup Inc. are advising investors - not to play it cautiously - but to buy stocks during what Citigroup expects to be a series of steep sell-offs in the coming months.  "We still see upside for equity markets, but we caution that higher volatility and bigger corrections are likely," Citigroup said in a note released today, as quoted by CNBC. The Citigroup report "recommends buying equities on the bigger dips," according to CNBC.

As a result, while the S&P 500 Index (SPX), the Dow Jones Industrial Average (DJIA) and other indexes were up sharply today, investors know those gains can quickly turn into market routs, providing possible buying opportunities.

Citigroup's Logic

Citigroup's recommendation goes counter to the strategy of many investors, who have stopped buying on the dip. During much of the bull market, many investors fearlessly bought on one stock market dip after the other, confident that equities would rise. But the sharp downdrafts of recent months have made many investors wary.

Now, Citigroup has a clear logic for buying on the really big dips, or giant sell-offs. "Our latest round of forecasts imply a rise in global equity markets of about 8 percent to the end of the year, led by Europe with about 13 percent," the Citigroup note said, as quoted by CNBC. In particular, Citigroup projects continued economic expansion worldwide to be the main driver of further stock market gains, with tax cuts in the U.S. giving "increased room for investments from several companies," as CNBC summarizes the note.

'Investors Aren't Maxed Out'

Strategists at Bank of America Merrill Lynch also are betting that the bull market is not over yet, having set a target value of 3,000 for the S&P 500 Index (SPX) this year, Barron's reports. That would be 14.6% from the open on April 9, a 4.4% gain from the record high close on January 26, and a robust 12.2% advance for 2018.

As Savita Subramanian, U.S. equity and quantitative strategist at BofA Merrill Lynch, told Barron's: "Fundamentals aren't at levels that have typically accompanied market peaks, bear markets, and full-blown corrections. [Upward] earnings revisions are at all-time highs, and companies' earnings forecasts are above analysts' estimates. While sentiment is more positive than last year, investors aren't maxed out on equities." She also made reference to her firm's contrarian Sell Side Indicator, which suggests that bullish sentiment is not excessive right now. (For more, see also: Stocks Poised for Bull Run in April Despite Monday Sell-Off.)

Downside Risks

To be sure, Citigroup listed a number of downside risks in its report today, per CNBC, which include a decline in global economic growth and rising interest rates. Rising rates would crimp corporate profit margins, Citigroup says, sending stock prices downward. They might have added that rising rates also would reduce the attractiveness of stocks versus bonds, partly by decreasing the present value (PV) of anticipated future corporate earnings, and partly by making dividend yields on stocks less competitive.

Scott Minerd, managing partner and global chief investment officer (CIO) of Guggenheim Partners, has gone a step further. He warns that rising interest rates could set off an avalanche of defaults among over-leveraged companies, eventually causing a stock market collapse of 40%. A setback of that magnitude would erase all the gains for the S&P 500 since June 2013. (For more, see also: Stocks On 'Collision Course With Disaster,' Face 40% Drop.)

Signs of Slowing Growth

Meanwhile, there are signs that economic growth may be starting to slow down, per The Wall Street Journal. Among these are: declining indicators of manufacturing and services activity in the U.S.; three consecutive months of falling retail sales; a deceleration of construction spending since the start of 2018; flat auto sales; and a significant decrease in the rate of job creation.

Indeed, the Citigroup Global Economic Surprise Index dropped below a value of zero on Friday for the first time since August, the Journal notes. This indicates that global economic data now is generally coming short of forecasts, per the Journal. However, Citigroup has warned that their Economic Surprise Indices are designed mainly as tools for foreign exchange (FX) traders, and are not reliable indicators of future stock prices, as Seeking Alpha quotes Citigroup.

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