After the rapid movements of the last few days, it is necessary to take a brief look at the situation and understand its implications. The latest Manufacturing report (PMI) came out worse than predicted at 46.8, compared to the forecast of 48.8. This marks the fourth consecutive month of poor results for manufacturers, highlighting ongoing challenges in the sector.
In contrast, the Services sector performed relatively well, with a reading of 51.4, significantly better than the 48.8 recorded in June.
Although these figures do not necessarily indicate a recession, - they still reflect challenging conditions for the overall economy. The unexpectedly weak June services report shows the volatile nature of the current economic landscape.
So, let’s have a look at some emerging trends here:
Unemployment
The latest unemployment figures were not encouraging at all. The unemployment rate rose by 0.2 percentage points to 4.3 percent in July, with the number of unemployed people increasing by 352,000 to 7.2 million. This is a very significant jump IMHO.
These numbers are higher than a year ago when the unemployment rate was only at the 3.5 percent mark, and the number of unemployed people was around 5.9 million. The current rise over several months period indicates potential stress in the labor market, which, as a result, could impact consumer confidence and spending.
Stock Market
These economic indicators have resulted in a correction across major stock markets, including the S&P 500,
EuroSTOXX,
and DAX:
As I have mentioned many times before, global markets tend to correlate and often behave similarly in response to economic data.
Looking at these figures as well as the FOMC's forecasts, it seems likely that interest rates will be cut in September. The market appears to be anticipating this possibility, as reflected in recent trading patterns.
Sector Rotation and Market Dynamics
A crucial aspect to watch is sector rotation.
This chart shows the ratio of the MSCI USA Cyclical Sectors Index to the MSCI USA Defensive Sectors Index. When the ratio rises, cyclical sectors are outperforming defensives, and when it falls, defensive sectors take the lead. Recently, the cyclical sector has reached historic peaks relative to the defensive sector index.
Looking more closely – it becomes rather clear which sectors have taken the lead during the last three months: Healthcare, Utilities, Consumer defensive, and Real estate.
Speaking of the Real estate sector, it seems that the market is "pricing in" the reduction of interest rates already. So, the most aggressive market players are already taking action.
Regarding the other sectors that have grown during the last 3 months, everything looks very logical: strong players in the defensive sectors + the technology sector that craves eternal growth. So, here we can only witness the old saying "software is eating the world" in action that unfolds before us.
Sector Performance Insights
By examining recent sector performance, we can spot some valuable insights into current investor sentiment and market dynamics. Over the last three months, certain sectors have emerged as leaders, which aligns with the discussed trends in sector rotation.
Look at these recent Sector Leaders:
Real Estate
- The real estate sector has shown strong performance, likely driven by expectations of interest rate cuts. Lower rates generally lead to more attractive financing conditions, boosting demand for real estate assets.
- The sector's resilience may also be supported by a recovery in commercial real estate demand and ongoing housing market strength.
Healthcare
- Healthcare stocks have been performing very well, benefiting from their defensive characteristics and consistent demand for healthcare services, regardless of economic conditions.
- The sector's performance is further bolstered by innovations in biotech and pharmaceuticals, which continue to attract investor interest.
Consumer Defensive
- Consumer defensive stocks have also led the market, as investors seek stability amid economic uncertainties. These stocks, which include companies providing essential goods and services, are typically less sensitive to economic cycles.
- The sector's outperformance confirms the thesis that investors are rotating into defensive areas as a precautionary measure against potential market volatility.
The outperformance of real estate, healthcare, and consumer defensive stocks over the past three months supports the idea of sector rotation into more stable and defensive areas. This shift indicates a cautious optimism among investors who are preparing for possible economic challenges while positioning themselves for long-term growth opportunities.
So, the question arises - is this a turning point? Or just a minor adjustment? Especially taking into account that the market is waiting for a period of interest rate reduction - therefore, more attractive lending conditions. I think that we also can predict an increase in the "money supply". Which in turn will stimulate the economy and promote further growth of financial instruments. The influence of money supply (M2 - money supply) on financial instruments is very direct - we can see this in the following graphs:
When global money availability increases, the S&P 500 tends to rise. The correlation is evident. Even Bitcoin cannot escape this correlation.
Future Outlook
Ultimately, when looking at all this, it is rather obvious to conclude what we already know - we are all in the same boat.
The most aggressive market participants are not wasting time, already trading the "defensive sectors". Now the question arises - how long will this trend continue? At what moment will the market start pricing in the potential growth of M2?
I always say - follow the money!
See which sectors and shares accumulate money now. This tells us a lot and helps to predict further market moves! And - follow the macro-economic trends: keep an eye on how quickly the interest rates will be reduced.
Then, apply your knowledge of the Technical analysis (TA) to get a better sense of timing - WHEN to act. So, Fundamental analysis (FA) can help you to spot a trend but without knowledge of WHEN to act you won’t be able to make use of opportunities like these. That’s why often, even excellent macro analysts make mistakes: even overall analysis may seem right, but their chosen moment is not.
So, if the market goes in the opposite direction, then you are either wrong in your analysis or in your timing. That’s why it is very important to keep everything in balance – don’t blindly rely and trade on Fundament analysis only, just like you should not rely only on Technical analysis as well.
Stay tuned!
Agris
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