Snapshot

Markets

Is this market losing its marbles?


Joseph Greif

Fund Manager, Multi-asset

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The chart that caught the eye of the Schroders Multi-Asset Investment team this month shows that the relationship between the ISM Manufacturing Purchasing Managers' Index (PMI) and the S&P 500 index has broken down.

The PMI is based on a survey of purchasing managers from more than 300 manufacturing firms. It is a widely followed and influential gauge of business confidence, as it incorporates new orders, production, employment, supplier deliveries and inventories.

Typically, when the index is rising with improved business confidence, stocks climb. Conversely, when it is falling, the stock market follows suit.

However, as the chart below shows, business confidence has fallen in recent quarters. At the same time, the US stock market has rebounded to near all-time highs.

Multi-asset chart of the month2019-June-Multi-asset-chart-of-month.jpg

What’s more, while equities (stocks) have risen, so too have bond prices. This is as investors anticipate that the US Federal Reserve will reverse its policy tightening and begin to cut interest rates.

An environment characterised by simultaneous strength in equity and bond markets is not sustainable. But as this long economic cycle is drawn out, can business confidence and economic growth return to support equities? Or have risk markets begun to lose their marbles?

We on the Schroders Multi-Asset Investment team have a neutral stance on equities while we await greater clarity on how this macro-economic picture plays out.

We currently have a supportive view of bond markets given the re-emergence of central bank support, weaker economic indicators and the persistence of political risks across various regions, which all support this defensive asset.

It is important to note that Schroders does not provide advice and this should not be perceived as a recommendation to purchase or sell a particular stock or asset class.

 

 

 

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The forecasts stated in the document are the result of statistical modelling, based on a number of assumptions. Forecasts are subject to a high level of uncertainty regarding future economic and market factors that may affect actual future performance. The forecasts are provided to you for information purposes as at today’s date. Our assumptions may change materially with changes in underlying assumptions that may occur, among other things, as economic and market conditions change. We assume no obligation to provide you with updates or changes to this data as assumptions, economic and market conditions, models or other matters change.