Will the stock market drop? JPMorgan says pay attention to these three pointers
The S&P 500 is down about 19% so far this year, while the high-tech Nasdaq Composite is down about 28% since the start of 2022.
In a note last week, strategists at investment bank JP Morgan identified three key indicators that market participants should watch as they attempt to navigate more volatile waters in the coming months.
M1 Money Supply and PMI
The first reading cited by JP Morgan analysts was the M1 money supply, which takes into account all money in circulation in the United States either in cash or bank deposits.
M1 is controlled by the monetary policies of the Federal Reserve. Its relationship to another set of indicators – Purchasing Managers’ Indexes (PMIs) – was cited in JP Morgan’s note as an area to watch.
While analysts said further PMI weakness is likely, the leading indicators “were not unanimous in terms of the extent or duration of the softness”.
“The real M1 is likely to remain under pressure as eurozone inflation remains elevated through the end of the year, thanks to higher gas prices,” the note’s authors said. In contrast, the headline of the US consumer price index [consumer price index] It is expected to halve over the next six months.”
They added: “The nominal M1 level, though, aligns with existing PMIs, and does not indicate further weakness in the PMI.”
And while there is still some uncertainty about the outlook for PMIs, analysts said that more PMI softness is “not necessarily” a problem for stock markets.
“We’ve found over the past two to three months that ‘bad data streams will start to be seen as good’ and we think this is likely to continue to hold,” they said. “For example, last week in the US, very weak PMI and weak housing data flow were met with favorable stock trading on the day, supporting this call.”
On another positive note, analysts at the banking giant said the message was “encouraging” when looking at new orders for inventory ratios.
“These indicators are generally close to the lower end of their historical ranges,” they said. “Back testing from current levels has produced solid market returns over the six to 12 month time horizon.”
earnings per share ratio
JP Morgan also looked at earnings per share (EPS) ratios for stocks, and noted that these “appear to hold up much better than the PMIs suggest.”
The bank’s experts concluded that “in the past four months, a gap has opened, with almost all sectors performing better than the PMIs indicate.” This is unprecedented, but it could still be, as explained by FX [foreign exchange] tailwinds, better power performance and pricing, and very low utility costs.”
prospects for monetary policy
Stock markets have been largely affected in recent months by monetary policy cycles, as investors have taken a more risk-averse approach as they anticipate more hawkish strategies from central bankers on a mission to curb inflation.
However, JPMorgan said in a note last week that it does not believe the market’s reaction to hawkish signals from the Fed will become entrenched.
“Jackson Hole’s messaging has remained hawkish, which has been behind the latest bout of risk-off, but we don’t think this will have legs,” the bank’s analysts said, referring to Federal Reserve Chairman Jerome Powell’s speech at the central bank’s annual symposium.
“We continue to believe that September will be the last of the big increases by the Fed, with the Fed’s position more balanced after that.”
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