Deutsche Bank: us stocks may fall 10% in the next three months

Binky Chadha, chief US equity strategist at Deutsche Bank, expects the US stock market to fall sharply over the next three months as US macroeconomic growth indicators peak this summer.

In a report released on Monday, Chadha warned clients that the stock market would rise slightly "in the short term" on the back of higher earnings and accelerated growth, but that the stock market would undergo a "significant consolidation" of between 6 and 10 per cent as economic growth peaked and slowed.

His report uses the Institute for supply Management's (ISM) manufacturing index to measure cyclical macroeconomic growth.

'historically, macroeconomic peaks have been linked to a shift in the stock market down, and stock market movements have been closely related to cyclical macro growth indicators such as the ISM manufacturing index, 'Chadha wrote.

He explained that growth in ISM data "usually peaked about a year (10-11 months) after the end of the recession, and it seems to us that it will now reach that level". Historically, when the ISM flattened or peaked and then began to fall, there was a sell-off in the S & P, and the greater the decline, the greater the sell-off. He wrote:

"near this peak of growth, the median sell-off in the S & P 500 was-8.4 per cent; even when the ISM data leveled off rather than fell, the median decline was 5.9 per cent."

At present, the ISM index seems to have reached its peak. The US manufacturing sector expanded at its fastest pace since 1983 in March, buoyed by the strongest orders and production data in 17 years.

The index of US business activity rose to 64.7 from 60.8 the previous month, according to data released by ISM on Thursday. The result exceeded the forecasts of all economists surveyed.

Us service sector activity also grew at its fastest pace on record in March. The latest data released on Monday showed that the ISM services index rose to 63.7 from a nine-month low of 55.3, the strongest since records began in 1997.

Deutsche Bank economists expect the ISM index to level off from the second quarter and continue into the third quarter. Chadha also said that the overall stock market position has increased, which is not common at the beginning of the economic recovery, which indicates that the magnitude of the next three months will be higher than the average historical correction, with a maximum correction of 10%.

In addition, when the US ISM manufacturing index is above 60 (such as now), the S & P 500 has a negative forward return of 3-6 months, according to Goldman Sachs and SoberLoook.