Citi published a scary update to its market clock chart at the end of last month. According to Citi’s analysis, the economy has moved into Phase 4 of the economic cycle, the point at which both credit and equities move into recessionary downward cycles:
The US is further along in the clock rotation than the eurozone is. But both are heading into the dreaded Phase 4.
The last time Business Insider looked at the Citi clock, in August 2014, it was still in Phase 3. Here is how the clock works, according to Citi global strategy analyst Robert Buckland:
- Phase 1: This begins at the end of a recession, when interest rates have fallen, money is cheap, but stocks are still battered.
- Phase 2: A bull market sets in during phase 2, when stocks start to rise as easy credit lubricates the economy.
- Phase 3: This is the tricky part. Stocks are still flying high, but credits spreads are widening as investors become increasingly unwilling to finance further risk. Corporate CEOs have now experienced a lengthy period of gains and become risk-happy. (And we’d note that central banks are already talking about tightening credit by raising interest rates.) Bubbles can form in Phase 3, as the high-flying stock market ignores the early warning signs of the deteriorating credit market. Hello, tech startup IPOs!
- Phase 4: Stocks react to the lack of available credit by collapsing, and we see the kinds of things you get in a recession: “This is the classic bear market, when equity and credit prices fall together. It is usually associated with collapsing profits and worsening balance sheets,” Buckland said last year.
Which sounds like exactly what’s happening right now …