Stock Sell-Off Should Be Wake Up Call: SocGen’s Edwards
Wednesday's sharp sell-off in U.S. stocks should be a wake-up call for investors, Societe Generale's notoriously bearish strategist Albert Edwards said, adding that weak manufacturing data merely illustrated the continuation of a clear downtrend.
"I might be wrong, but I just don't see this economy as healthy. If I am right, then any sharp rise in bond yields should quickly derail this apology of a recovery," Edwards wrote in a note, published on Thursday.
The Dow Jones Industrial Average closed below 15,000 points on Wednesday, for the first time in a month. This followed the publication of the Institute for Supply Management's (ISM) index, which showed that U.S. factory activity fell to 49.0 in May, below the 50-point level signaling growth. However, many investors are convinced the bull market remains intact, with bargain hunters still keen to step in.
Alberts argued that ISM data is a poor gauge of whether a recession has started,and said he preferred to look at company earnings.
"Profits, for us, are a leading indicator for corporate spending. Hence, with profits essentially flat for the last four quarters, history suggests this is not good news for the economy," he said.
Alberts conceded that U.S. companies had a tendency to "play games" by manipulating analysts' earnings forecasts down, only to beat estimates on the day. However,he said that the rate at which companies' outlooks were being downgraded was still a worrying sign.
"It tells us something about the underlying rate of deterioration in U.S. corporate profits, and confirms to me that the downturn in the margin cycle has started," he said.
He warned that in addition to the margin downturn, revenue growth was also flagging badly.
"Thus we may well be in for a double dose of bad news—both falling revenues and falling margins. History suggests this as good a leading indicator as any other, for whether the U.S.economy will endogenously fall back into recession," he said.