September 24, 2023

During my long career in finance, I picked up several market heuristics that have generally proven to be more useful. Every January, for example, I remember “five day rule,” which assumes that if the S&P 500’s SPX,
The accumulated performance is positive in the first five days of the new year, with an approximately 80% chance that the overall market will end the year higher than where it began. So far, despite all the uncertainties in the world, this analytical trick has worked very well.

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with spring comes another rule of thumb: “Sell in May and go away” (and, for us Brits, “come back on St Leger’s Day” – September 15). Although less statistically accurate, it has also often proved useful. If you’re an investor — especially one who’s had a good first four months of 2023 — you may want to put your profits in the bank and sit on the sidelines until the plunge, because there’s a good chance that the mid- The market will decline in months. ,

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Of course, there is no objective reason why any of these rules are correct. After all, equity markets historically tend to rally more than they fall, and they generally outperform other financial markets — not to mention cash or fixed income — over time. Obviously, one should never allow rules of thumb to override fundamentals. Yet there are times when the fundamentals can get pretty murky, and there’s good reason to think we’re in such times right now.

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Consider the latest round of the monthly Purchasing Managers’ Index in Globally Important Countries, don’t even show persistent weakness in manufacturing; They also indicate that the global economy may technically be experiencing a manufacturing recession, At the same time, service index remain strong and in some cases even accelerating.

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While some service-dependent economies (such as United Kingdom) can cope relatively well with manufacturing weakness, it is highly unlikely that these two indexes will move in opposite directions for an extended period of time. Service industries will either eventually encourage other forms of activity, or they will be dragged down by their dependence on other industries.

, As always, China provides an important window on the global economy. ,

As always, China provides an important window on the global economy. Following the end of its zero-COVID policy late last year, the Chinese economy has strong start through 2023, and upcoming data will almost certainly show a strong year-on-year acceleration in April for many components of output and demand.

But there are signs that recovery may be speeding decrease, and that various structural challenges are holding back the activity. In addition, inflation in China has not only decreased, but has fallen so far To raise concerns about deflation. Nor is China alone. Other important Asian economies, like japanIn contrast to the rising price levels seen in Western economies over the past year and a half, they are also experiencing low inflation.

Looking beyond Asia, I have become confused by the inflation indicators I rely on most. For example, recently producer price index In the United States, there are clear signs of a recession with some components of consumer prices. As I mentioned Earlier, many global commodity prices Now much less than a year ago.

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Sooner or later, these developments must be factored into many producer and consumer prices. But in the latest “core” inflation data (excluding volatile food and energy prices) We., The UK., And this European Union The picture has been complicated by the continued strengthening of price pressures. and the University of Michigan looked closely Five Year Inflation Expectations Survey There has been a significant increase recently to 3.2% after falling to 2.9% in the previous months.

Central bankers undoubtedly remain troubled by the situation. One hopes that the most recent figures are just a one-off exception. But if it doesn’t, the US Federal Reserve will face a very problematic situation.

, The interest rate outlook remains the elephant in the room. ,

The interest rate outlook remains the elephant in the room. Right now, markets are fairly convinced that most central banks are either at or near “perfect” to raise rates, and some are speculating even more. rate cut before the end of the year. could be possible; But first, the inflation data would need to be revised slightly. On the other hand, barring a significant uptick in earnings, fresh rallies in equity markets will be hard to sustain if current market expectations are forced to change.

Where does that leave us before summer? Overall, I suspect that the inflation picture will continue to improve gradually. But if the Michigan survey’s findings about inflation expectations are not reversed, equity investors will have good reason to worry.

Jim O’Neill, former chairman of Goldman Sachs Asset Management and former UK Treasury Secretary, is a member of the Pan-European Commission on Health and Sustainable Development.

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