Ned Davis Research Doubles Down on Its Bearish Global Equity Call

(Bloomberg) -- Ned Davis Research has pushed its bearish call for global stocks to the limit.

Tim Hayes, the firm’s chief global investment strategist, cut the recommended equity allocation for a second time since October. Down by 10 percentage points to 40 percent, the assigned proportion is the lowest since 2008 and has “reached the downside extreme of what we would ever recommend for equity allocation,” he said in a research note.

Investors should shift the money to bonds as a bear market in stocks deepens, Hayes said. As a result of the rotation, his model portfolio calls for half the money earmarked to bonds and 10 percent to cash.

Ned Davis Research Doubles Down on Its Bearish Global Equity Call

The downgrade comes as the MSCI World All-Country Index heads for its worst quarter in seven years. Stocks may not find a floor before March because the research firm’s models on market trends and breadth keep deteriorating and extreme fear has yet to emerge.

“Advising maximum defensive positioning whatever your constraints and risk tolerance, we would view any rallying as an opportunity to lighten up ahead of increasing volatility in 2019,” Hayes wrote in the note Thursday. “We have not seen the levels of panic, volatility, and downside volume needed to consider the market sufficiently washed out for the start of a bottoming process.”

Hayes started dialing back his optimism on stocks in February, particularly American equities, saying policy uncertainty and higher valuations made the U.S. vulnerable. Twice in October he urged investors to trim exposure to the country, saying the S&P 500 wasn’t immune to a global sell-off. The benchmark index is down more than 7 percent this year, poised for its worst annual return since the bull market began in 2009.

Equity investors should prepare for more pain in January because history is not on their side, Hayes warned. During the past two decades, stocks have tended to trail bonds at the start of a year, the firm’s data showed.

Added to the unfavorable seasonality is a fresh sell signal from Ned Davis Research’s momentum indicator that’s based on the MSCI World Index’s six-month change. At the same time, half of the indicators the firm tracks for bear market signals are flashing danger.

Ned Davis Research Doubles Down on Its Bearish Global Equity Call

Since 1985, there have been eight times when the firm’s bear market watch indicators flashed similar warnings. In every instance, global stocks fell, with losses swelling to a median 20 percent over the next few months, Ned Davis data showed.

“Market conditions will get worse before they get better,” Hayes wrote.

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