This indicator has triggered just 5 times since 2000 - and it warns of a trap for stocks

By Jules Rimmer

Why 2026 is starting to look uncomfortably like 2000 and 2007 for the stock market

A research service flags a trap where the Federal Reserve will be unable to respond to market turmoil.

Investment strategists at a macro research service say an indicator that has only turned cautious five times this millennium is telling investors to take a more conservative approach.

The team at Variant Perception, a research provider based in Charlotte, N.C., is instructing clients to go from a bullish, risk-on approach to a more neutral stance, which means lowering the weighting of stocks in portfolios and replacing them with bonds and cash.

On five occasions this century, there was a similar shift in the firm's macro risk indicator from very bullish to neutral: 2000, 2007, 2010, 2015 and 2018. The first two of those - the ones inflicting real damage - resulted from rising inflation, which prevented central banks from easing to inject liquidity.

Variant Perception's Macro Risk Indicator has slipped from the "risk-on" regime to neutral, continuing its multimonth downtrend

The later drawdowns all coincided with a deflationary environment, allowing monetary authorities to pivot quickly and reflate markets and asset prices. Given headline inflation of around 3.7% and the Federal Reserve still in tightening mode, the situation ominously resembles 2000 and 2007 more closely.

The team highlighted a mix of Iran risks, inflation, the development of credit issues and peaking artificial-intelligence capital expenditure as themes the markets must negotiate. As a consequence, the note predicted that "the current chop across asset markets will likely persist into 1Q2027." The report anticipates that tighter credit and liquidity next year will force decelerating AI capex, more credit events and the Federal Reserve being forced to adopt a more dovish approach.

The Variant Perception team also noted that the strongest El Niño weather pattern in living memory "threatens to layer a food price shock on top of the current energy price shock." The team cited charts illustrating that temperature anomalies lead world food prices by about 12 months.

Varian Perception reversed from risk-on to risk-off based somewhat on buffers provided by strong earnings. The team takes encouragement from the leading earnings-per-share indicator signaling better growth than the current 16.3% expected for the S&P 500 SPX in 2027 and the net share of companies experiencing a positive earnings outlook is rising. Given the greater vulnerability of small-cap companies to higher interest rates, Variant Perception argues in favor of underweighting this asset class.

When it comes to equity portfolio selection, Variant Perception is attracted by the growth prospects of semiconductor stocks SOX and their quality-at-a -reasonable-price metrics also highlight the energy XLE sector as attractive. They also overweight financials XLF but are deterred from healthcare XLV, software IGV and consumer staples XLP by lower growth and more demanding valuations.

-Jules Rimmer

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