The prevailing opinion is that we are in or about to enter the second year of a global economic recovery. These times are generally good for the stock markets.
Over the past three months, however, positive equity momentum has stalled, with the S & P / ASX 200 benchmark index down 3.6 percent from its August 13 high.
So what’s going on here? Is the economy to blame?
Unfortunately, we won’t know the economic growth of the September quarter until December. However, we can look at alternative statistics.
The Purchasing Managers Index (PMI) provides more up-to-date information in many countries.
The report is produced by surveyed companies to ask a simple question: is your business growing, staying the same, or shrinking?
The latest PMI report showed slower growth around the world, particularly the Future Growth Index.
The Future Growth Index is a measure of new business orders and inventory levels. If a larger proportion of companies are seeing increasing orders, that’s good news for the economy.
When a company has soaring new orders, it has to meet them either by increasing production or by selling its inventory.
Falling inventories are also usually good news for the economy, as the company will soon have to produce more goods. A company cannot resell its inventory without increasing production.
In contrast, rising inventories or lower orders are both negative economic indicators.
The Future Growth Index compares the percentage of companies with a positive opinion minus the percentage of companies with a negative opinion. Therefore, a positive number is a good sign of future economic growth, zero is neutral, and a negative number is bad news.
The recent economic recovery has been patchy across Asia. The latest Future Growth Score for Australia was 2.4, down from -5.2 in October 2021, the lowest index value since February 2016.
More worrying, however, is the economic weakness of our major trading partners.
Weighted by trading volume, our export markets recorded a Future Growth Score of 2.3, compared to 4.1 in July 2021 and 6.5 in May 2021.
While domestic economic news is important, investors should keep an eye on the economic events of our largest trading partners – China, Japan and Korea – which together account for more than 60 percent of our exports.
They can provide a better indication of where our economies – and stock markets – could be headed.
- The advice in this article is general in nature and is not intended to influence readers’ decisions about investment or financial products. You should always seek your own professional advice, taking into account your personal circumstances, before making any financial decisions.
Mike Aked Research Director for Australia at a US investment firm Research partner.