Is this market losing its marbles?
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 month
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.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.