Over at the Financial Times, Citigroup’s Global Market Strategy latest viewpoint on the markets were released, they are now thinking that we are approaching a “bubble” phase of the markets, its an interesting read and just something to keep in mind.
The cycle begins as the credit bear market ends. Spreads fall as companies repair balance sheets, often through deeply discounted share issues (Telecoms in 2002- 03, Financials in 2008-09). This dilution, along with continued pressure on profits, keeps equity prices under pressure. For the present cycle, this phase began in December 2008.
Phase 2: Credit Up, Equities Up
The equity bull market begins as economic indicators stabilise and profit forecasts soon follow. The credit bull market continues as improving cashflows strengthen company balance sheets. For the present cycle, this phase began in March 2009.
Phase 3: Credit Down, Equites Up
The credit bull market is over, spreads start to rise as investor appetite for rising leverage wanes. But the equity bull market continues as profits and CEO risk appetites rise further.
Phase 4: Credit Down, Equity Down
This is the classic bear market, when equity and credit prices fall together. It is usually associated with collapsing profits and worsening balance sheets. Insolvency fears plague the credit market, profit warnings plague the equity market. Cash and government bonds are the best-performing asset classes.