Markets are showing a lot of parallels with periods of turbulence in the 2010s — and that suggests a “big, chunky sell-off” is imminent, according to Chris Watling, CEO and chief market strategist at Longview Economics. “Liquidity is tightening up in the world, and it’s showing up in lots of places,” Watling told CNBC’s “Squawk Box Europe” on Thursday. He cited the rising risk premium on French government debt and its spread with other euro zone nations, stress in CCC-rated U.S. corporate bonds and high-yield credit, and some areas of the stock market. “It’s like a pressure cooker, and I think every few years we get this. And it generally happens when central banks change their direction of travel,” Watling said, noting the global shift from interest rate cuts to rate hikes over the last few months. “I think we’ve got a two to six-month sell-off in in risk assets that’s brewing and that’s going to break any moment now,” he said, forecasting a pullback of around 10 to 20% on the S & P 500 . Watling said he saw strong comparisons with 2018, 2015 and 2011 when the “market goes sideways” early in the year, causing confusion. Then “breadth falls apart” as gains become fueled by a shrinking number of entities — “and then bang, the market sells off hard.” “I think this is the kind of environment we’re in. The rates are going up. The bulls are saying, ‘Well, there’s seven stocks with amazing earnings growth, don’t worry about it.’ But in reality, everything’s falling bit by bit. The dominoes are going. So I think we’ll see a big chunky sell-off.” This would be a “mid-cycle correction” rather than a recession, Watling noted, describing the U.S. economy as in “good shape.” Rising U.S. bond yields are chiefly a reflection of the acceleration of the capex boom centered around artificial intelligence and a rapid increase in debt issuance by corporates set to drive stronger growth, he argued. A sell-off in risk assets would reset interest rate expectations, jolt the economy and bring liquidity back into the system, according to Watling. The S & P 500 hit a record high this week , defying rate hikes, competition from higher returns on government bonds, an energy market shock, and volatility associated with the U.S. and Israel’s war in Iran. But Watling is not the only person to flag a coming correction, generally defined as a 10% to 20% decline in value from a recent peak. Economists at the European Central Bank published a report in August stating that “economic research on past technological revolutions points to a worrisome conclusion: a correction of current stock market valuations is likely.” They tied their argument to the spread of the impact of artificial intelligence to virtually all sectors of the economy, as happened with the railroads, electricity and the internet, which eventually causes investors to demand a higher risk premium that drives down prices. This could be followed by a subsequent rebound, they added, but could leave investors exposed. Watling highlighted one area of the market that could provide a hedge. “If you look at euro zone consumer staples, it’s not the sexiest sector out there, but its valuation relative to the market has never been cheaper,” he told CNBC. “These stocks are deeply unloved, deeply beaten up, and of course they don’t like rising bond yields. And once these sort of rising bond yields break, then I think you’ll find that actually those sort of places are a good place to hide for a few months.”
