Citi downgrades U.S. stocks to neutral over recession risk, still positive on Chinese stocks

Yahoo Finance Live anchors discuss Citi downgrading its U.S. stocks to neutral over recessionary risks.

Video transcript

JULIE HYMAN: Let's bring in thing number two. Citigroup is downgrading US stocks to neutral in the face of recession risk and growth slowdown. The strategists over at Citi say the market is showing signs of what they call a deflating bubble. On the other hand, the bank is optimistic about Chinese stocks, saying it still wants to be exposed to Chinese assets. This despite both US and Chinese stocks seeing double digit declines here today.

And this-- Citigroup here is really the latest of the big banks to get a little more cautious, a little more bearish, a little less bullish. We've certainly seen Morgan Stanley be pretty consistently in that camp. But it is interesting here. And the analysts, the strategists there, saying, it'll likely take time for the Fed to react to equity and growth weakness. And that's also something to react to, which is kind of what you were just talking about.

JARED BLIKRE: Right, because everybody wants the Fed-- well, everybody is looking at their 401(k)s and their account statements, wants the Fed to ease up. But the Fed is resolved. They have to fix the problem. And the problem is high inflation. And this is affecting disproportionately the lower income Americans. So back to the Citi note, this is just the latest in a growing chorus of analyst notes that are coming out and saying, we should expect lower prices in stocks.

And that's not what the market wants to hear, obviously, but what does that mean in terms of the context of the little-- the nascent bounce that we have here? It's not even a rally. It was just three or four days. Nice to see, but is it going to have legs? The growing chorus says no. So here's the pain trade. What if we actually got back to record highs? I think it's unlikely at this point.

And I think it's going to take a long time, because the market is not primed the way it was after the pandemic, because we don't have the fiscal stimulus anymore. We don't have that tailwind. We don't have the monetary tailwind. I think the pain trade is actually sideways. It's not going to go down that much. It's not going to go up that much. It's just going to frustrate most investors.

JULIE HYMAN: And maybe bounce around a lot--

JARED BLIKRE: Yeah, lots of bouncing.

JULIE HYMAN: --in that range, which is what we've been seeing a little bit of--

JARED BLIKRE: Sideways.

JULIE HYMAN: --this week also, with the kind of sideways movement. It's interesting to me because even as we are seeing strategists get a little more bearish, money's still going into stocks, and particularly going into US stocks, so.

JARED BLIKRE: Yeah, that was interesting.

JULIE HYMAN: Yeah, Bank of America pulls from that EPFR global data, which has fund flows, and global equity funds had their biggest inflows in 10 weeks last week, $20 billion in the week ended May 25. And the US led those inflows. So it's quite interesting. And I don't know if that's a TINA situation, There Is No Alternative, or least dirty shirt or whatever you want to call it.

JARED BLIKRE: Right.

JULIE HYMAN: Maybe it's because of the pullback that we've had that people are now putting their money back to work. But it is going to be painful if, then, it's just bumps to the side.

JARED BLIKRE: It is, and I take the fund flows with a grain of salt, but it is interesting when you have a reversal, as we're seeing here today, this week. And as you said, it's been outflows for about seven or eight weeks. And now we're seeing money come back in.