Why one Wall Street firm sees parallels to the late 1970s and recommends shorting U.S. stocks

By Steve Goldstein

Citi's quantitative strategy is at odds with analysts at the same bank

Analyst at one Wall Street firm draw parallels to the late 1970s.

The artificial-intelligence build-out is most often associated with the dot-com boom at the end of the last century, but quants at one Wall Street giant identify another parallel: the bell-bottomed, polyester suit, high-inflation era of the late 1970s.

Citi's quantitative strategists, led by Alex Saunders, say their macro regime model is moving into late-cycle territory due to the combination of tighter financial conditions - with Treasury yields at two-decade highs and indigestion from a flurry of corporate bond issuance - and slowing positive economic surprises.

As the Wall Street firm fears moving away from what has been a Goldilocks environment, it's now recommending being 5% underweight on stocks in a portfolio, from a previous recommendation of being 4% overweight. The firm's quantitative team also is calling for a "small" short position in U.S. stocks as they prefer emerging-market equities.

The strategists said the late 1970s era - before the Paul Volcker-led Federal Reserve hiked interest rates to quash inflation - was initially marked by gains in the stock market, due to resilient growth and decelerating inflation, before prices began shifting higher and equities started falling. Iran was the geopolitical flash point then, with the Iranian Revolution, and now.

The Citi team note that trend-following strategies, which typically thrive in stagflationary environments, are coming off a strong month. They base that on their own simulation of how those funds behave, and data released this week from hedge fund data tracking firm HFR confirm a strong September for what's called commodity trading advisers, or CTAs.

The Citi warning is at odds with the rest of Wall Street and even other parts of the same bank. The firm's U.S. equity strategy team has a year-end S&P 500 SPX target of 8,100, and they expect a dovish shift at the Fed.

"Our [S&P 500] 8,100 target has always been premised on soft landing (if not goldilocks) economic conditions," said the head of equity strategy, Scott Chronert, this week.

The S&P 500 closed at 7,765 on Thursday, ending less than 1% away from a record high.

The tech-heavy Nasdaq Composite COMP has gained 17% this year.

-Steve Goldstein

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10-09-26 0449ET