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In a note to clients on Friday, Citi analysts told investors they should be chasing UST, not S&P 500.
The analysts explained that the rally in risk assets could continue at least until the mid-December central bank meetings.
“Median bear market squeezes are ~18% from trough to peak, which if realized this time around would bring the SPX to 4150. Additionally, throughout this year, the 12m fwd PE has failed to break above its 1y MA. There was a similar occurrence in 1994 when the Fed rapidly tightened. The 1y MA of the 12m fwd PE comes in at ~18x, which on current EPS estimate of $230, would infer an index level ~4140. From a price perspective, this would be below the summer high ~4330, so for Dow-theorists, a lower high in index level keeps the bear-market intact,” wrote the analysts.
Despite the recent rally, Citi is keeping its base case of a hard landing next year, while the firm feels chasing bond yields is a better option compared to equities.
“The gap between earnings yields and bond yields (EYG) is now tiny. The risk-reward of chasing equities (relative to chasing bonds) just doesn’t stack up, especially if you think a recession is on the way. We show this by bucketing the EYG and looking at SPX and UST forward returns. The latter screens as a buy. We bought USTs last week and still like the trade,” the analysts concluded.
