Inflation could trigger the next wave of turbulence—here’s why Citi says buy the dip

Equity index valuations are at elevated levels, potential credit downgrades are looming, and there is the possibility of inflation surprises this year, Citi said, underpinning strategists’ projections.

Financial valuations aren’t consistent with real-side measures like gross domestic product “by virtually all metrics,” according to the bank. This loads the gun for a turbulence trigger.

It could be inflation. The COVID-19 pandemic has laid the groundwork for inflation rates to be volatile in 2021. While Citi said there is “little underlying support” for sustained inflation, missing prices due to the effect of lockdowns and corresponding year-over-year base effects could scare markets.

A wave of turbulence could also be set off by slowing central bank purchases. Projections suggest that both the pace of purchases and net asset purchases will slow this year. Given the fact that net asset purchases are the main road between monetary policy and the real economy, Citi said that a modification to these patterns could surprise markets “no matter how hard central banks try to communicate in advance.”

Any turbulence is likely to hit equity and credit markets, according to the investment bank, because these asset classes are currently displaying volatility higher than recent norms.

So what should investors do? Citi recommends buying the next dip. 

The investment bank’s Global Bear Market Checklist is registering 8/18 red flags following the latest rally, which is the most markers since 2009. The U.S. market has 9.5 red flags while it is lower in Europe, with 5. 

That indicates a fair amount of “froth” in markets—the more frothy, the less inclined Citi’s model is to buy the dip. But it is still enough.

The buzz

Biden went to work on Wednesday reversing some of former president Donald Trump’s signature policies. He signed 15 executive orders, which include repealing the ban on immigration from majority-Muslim countries, revoking the permit for the Keystone XL Pipeline, and beginning the process of rejoining the Paris climate agreement.

Attention now turns to ushering a $1.9 trillion plan through Congress to aid the pandemic-ravaged economy, including sending $1,400 stimulus checks to Americans.

Online retailer Amazon AMZN, +1.75% has offered to throw its weight behind the new government’s promise to increase distribution of COVID-19 vaccines across the U.S., saying that it could help Biden reach his goal of vaccinating 100 million Americans in the next 100 days.

On the economic front, all eyes are on the jobs reports released today. Initial jobless claims to Jan. 14 came in at 900,000, fewer than the 935,000 expected and a decline from last week’s 965,000 surprise. There were around 5 million continuing jobless claims to Jan. 9.

December’s housing starts numbers came in at 1.7 million, above expectations.

Three Chinese telecom giants—China Telecom 728, -1.72%, China Mobile 941, -0.10%, and China Unicom 762, -1.81% —have asked the New York Stock Exchange to review its decision to delist them in accordance with a Trump-era policy.

Consumer-products giant Unilever ULVR, +0.07% has said that by 2030 it will ensure that all workers in its vast supply chain are paid a living wage by their employers. The multinational is behind brands including Ben & Jerry’s, Hellmann’s, Q-Tips, and Dove soap.

The markets

It is a good start to the day after yesterday’s big rally. Stock markets in the U.S. are higher, with the Nasdaq COMP, +0.24% ahead of the Dow DJIA, -0.05% and S&P 500 SPX, -0.03%. Asian markets NIK, +0.82% HSI, -0.12% SHCOMP, +1.07% broadly rallied while European markets UKX, -0.13% DAX, -0.24% PX1, -0.58% continued their advance. The pan-European Stoxx 600 SXXP, +0.09% is up eight of the past 11 days.

The chart

Trump’s White House days are history, with the stock market performance he presided over now for the books. Our chart of the day from Deutsche Bank DBK, -0.28% shows that Trump led the U.S. through the second-best S&P 500 performance since the Great Depression, in annualized terms. Bill Clinton, president through the dot-com bubble in the late 1990s, takes the top spot.

Random reads

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A woman ruled dead in 2017 is fighting to be declared alive.

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