The S&P 500 is down nearly 19% so far this year, while Nasdaq Aggregate prices have fallen about 28% since the beginning of 2022.
In a note last week, strategists at investment bank JP Morgan outlined three key metrics market participants should watch as they attempt to navigate the more volatile waters in coming months.
Money Supply M1 and PMIs
The first reading that JP Morgan analysts pointed to was the M1 money supply, which takes into account all of the money in circulation in the United States in the form of cash or bank deposits.
M1 is controlled by the monetary policies of the Federal Reserve. Its relationship to another set of indicators – the Purchasing Managers’ Index (PMI) – was referenced in JP Morgan’s note as an area to watch.
While analysts said the PMI was more likely to be weaker, leading indicators “did not agree on the extent, or timing, of the soft”.
“The Real M1 is likely to continue to come under pressure as inflation in the Eurozone remains elevated at the end of the year, driven by higher gasoline prices,” the note authors said. “In contrast, the US CPI (consumer price index) is forecast to halve within the next six months.”
They added: “Although the nominal M1 level is consistent with the current PMI and does not suggest further PMI weakness.”
While some uncertainty about PMI outlook remains, analysts say further softening of PMI is “not necessarily” a problem for equity markets.
“We have held the view for the past two to three months that ‘bad data will start to be seen as good’ and believe this will likely continue to persist,” they said. Last week in the US, a very weak PMI and weak housing data stream was met by favorable equity trading on the day, lending support to this call.”
On another positive expected note, the banking giant’s analysts said the message was “encouraging” considering the new orders to inventory ratio.
“These indices are often near the low end of their historical range,” they said. “The low test against current levels has produced strong market returns over the 6 to 12 month period.”
Earnings per share
JP Morgan also looked at earnings-per-share (EPS) ratios in stocks and noted that these “seem to be holding up much better than the PMIs would suggest”.
“Over the past four months, a gap has opened, with most sectors performing better than the PMI would suggest,” the bank experts conclude. . “This is unprecedented, but it is still possible, as FX tailwinds explained, that the topline and pricing power are better, and interest costs are still very low.”
Monetary policy outlook
Equity markets have been largely influenced in recent months by monetary policy cycles, with investors taking a riskier approach as they anticipate more hawkish strategies from banks. central government with the mission of reducing inflation.
However, JP Morgan said in last week’s note that it does not believe the market reaction to hawkish signals from the Fed will become entrenched.
“The message from Jackson Hole remains hawkish, which was behind the most recent round of taunts, but we don’t think this will have legs,” the bank’s analysts said. bank said, referring to Fed Director Jerome Powell. keynote speech at the central bank’s annual symposium.
“We still believe September will be the last month of Fed overshoots, with the Fed’s stance after that much more balanced.”
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