Stocks have been on a rollercoaster ride this year, with rising inflation, worries about housing bubbles and growing fears of an impending recession dampening investment sentiment.
The S&P 500 is down nearly 19% so far this year, while the tech-heavy Nasdaq Composite is down about 28% since the start of 2022.
In a note last week, strategists at investment bank JP Morgan outlined three key indicators for market participants to watch as they try to navigate choppier waters in the coming months.
M1 and PMI money supply
The first reading JP Morgan analysts pointed to was the M1 money supply, which takes into account all the money circulating in the United States as either cash or bank deposits.
M1 is controlled by the monetary policies of the Federal Reserve. Its relationship with another set of indicators — the purchasing managers’ indices (PMIs) — was cited in the JP Morgan note as an area to watch.
While analysts said more PMI weakness was likely, leading indicators “were not unanimous on the extent or duration of the softness.”
“Real M1 is likely to remain under pressure as eurozone inflation remains elevated at the end of the year, thanks to high gas prices,” the note’s authors said. “In contrast, the headline US CPI [consumer price index] predicted to halve over the next six months.”
They added: “The level of nominal M1, however, is consistent with current PMIs and does not suggest much further PMI weakness.”
While some uncertainty remained about the outlook for PMIs, analysts said further PMI softness was “not necessarily” a problem for equity markets.
“We’ve had a view for the last two to three months that ‘bad data flow will start to be seen as good,’ and we think that will likely continue to be the case,” they said. “For example, last week in the US, very weak PMIs and a weak housing data stream were offset by favorable intraday equity trading, providing support for this call.”
On another tentatively positive note, analysts at the banking giant said the message was “encouraging” when looking at new orders-to-inventories ratios.
“These indices are generally near the low end of their historical range,” they said. “The retracement from current levels has created strong returns in the market over a six- to 12-month time horizon.”
Earnings per share ratio
JP Morgan also looked at earnings per share (EPS) ratios in stocks and noted that these “appear to be holding up much better than PMIs would suggest”.
“Over the past four months, a gap has opened up, with almost all sectors doing better than the PMIs would suggest,” the bank’s experts concluded. “This is unprecedented, but it could stay that way, explains FX [foreign exchange] tailwinds, better top line and pricing power and still very low interest costs.”
Monetary Policy Perspectives
Equity markets have been heavily affected in recent months by monetary policy cycles, with investors taking a more hands-off approach as they awaited more aggressive strategies from central bankers on a mission to reduce inflation.
However, JP Morgan said in last week’s note that it did not believe the market’s reaction to hawkish messages from the Fed would take hold.
“Jackson Hole messages remained aggressive, which was behind the most recent risk-off fight, but we don’t think that will pan out,” the bank’s analysts said, referring to Fed chief Jerome Powell’s speech at the annual conference of the central bank.
“We still believe September will be the last of the Fed’s big hikes, with the Fed’s stance much more balanced thereafter.”
This story was originally featured on Fortune.com