"What happens next?" Everyone wants to know the answer, but nobody has it (if they do, they are lying).
Still, one attempt at framing the narrative, comes from BofA's Savita Subramanian. Here is the 30,000 foot cliff notes version of the two sides of the story.
First, the bear case, or as BofA calls it "an economic shock derails a fragile economy."
Concern over global growth has become more wide-spread, as suggested by the charts below. We believe that outside of an exogenous geopolitical event, an economic shock would most likely be tied to credit, where signs of stress are building the most.
- Growth expectations have come down over the past 12 months, per the Global Fund Manager Survey
- More investors are starting to believe we’re in the “late cycle”
- There are signs of stress in the high yield market, with distress ratio increasing recently
- More companies in the S&P 500 are projected to lose money than those with negative EPS 12M ago.
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And here is the "4 chart summary" of the bull case, which as usually expected, is "more aligned" with BofA's economists’ current outlook (which does not foresee a recession any time in the coming decade), where they see stable to improving growth in developed markets. This requires that China’s economy does not collapse. But much of the uncertainty may be reflected is asset process, and we see several reasons to remain positive.
- Valuations are still below average – see Chart 2 for the normalized P/E
- Short interest has risen over time and is at the highest levels since 2008
- Investors are underweight the US by a net 10% (per the Global FMS)
- Sentiment is still bearish, with our Sell Side Indicator in “Buy” territory (see Chart 12) and cash levels at mutual funds also generating a “Buy” signal per the Global FMS.
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A more detailed version of the above to follow tomorrow.