Citi: This Selloff Is 2011, Not 2008

A "rolling bear."

Deep Dive: Why the Selloff Is Steeper in 5-Year Yield

In 2016, risk assets have performed poorly, but risk appetite has taken an even bigger nose dive.

While U.S. data, particularly those pertaining to industrial segments of the economy, have been underwhelming, the march toward full employment continues unabated.

"There appears to be fear of fear itself as sentiment is simply awful," wrote Tobias Levkovich, Citigroup's chief U.S. equity strategist. "Almost every investor we talk to thinks we are too pollyannish by thinking the world isn't about to go off the edge." 

As usual during spans of red markets and elevated uncertainty, investors are searching for a useful parallel to the present-day situation. With banks at the core of the most recent leg of weakness in U.S. stocks, and risk appetite absent without leave, some investors and commentators have mused that a repeat of 2008 is at hand.

For Levkovich, however, a look at the underbelly of price action in equity markets and high yield bond spreads suggests the current scenario is much more like 2011, a stretch in which the S&P 500-stock index fell by nearly 20 percent:

Citigroup

"The percent of stocks down 30 percent or more off of their 52-week highs now match 2011-12 levels, suggesting that rolling bear markets beneath the index surface are quite severe," explained Levkovich.

A "rolling bear market" is one in which select segments come under particular pressure at staggered intervals.

This relatively broad-based severe damage in large-cap equities is not congruent with the more concentrated acute stress in high-yield debt. As such, Levkovich asserted that "there seems to be disproportionate fear in the stock market."

One piece of the narrative is even analogous. European banks are at the epicenter of market angst, just as during the sovereign debt crisis.

"With most data not implying an imminent U.S. recession, including the latest small business hiring intentions and rising open job listings, the comparisons to 2011-12 seem appropriate including sentiment metrics and collapsed stock prices," the strategist concluded.

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