In today’s Steady Investor, we are taking a deeper dive into key market factors that we believe investors should keep an eye on, such as:
Business Activity is Falling in Developed Countries Around the World – The composite purchasing managers index (PMI) is a useful indicator for gauging the direction of economic activity. Data compiled in the index is gathered via surveys of business leaders, with the questions focused on how activity has evolved with respect to new orders, hiring, prices, supplier deliveries, and other factors. Composite PMIs are not hard data like job numbers or retail spending, but they are reasonably effective at providing information about whether economic activity is picking up, slowing down, or stagnating. In the latest round of composite PMI data gathered in August, the signals were fairly clear: the global economy is slowing. The surveys indicated that business activity in the U.S., Europe, and Japan all fell in August, part of a larger trend that has taken hold this summer. Composite PMIs for the U.S. – which measure both factory activity and services activity – dropped to 45.0 in August, a decline from the 47.7 print in July. A reading below 50 generally signals a contraction. Abroad, the composite PMI for the eurozone was more encouraging, with a reading of 49.2 in August following a 49.9 reading in July. In Europe, manufacturing was weak but the services sector held up, perhaps as the summer tourism season and a strong dollar boosted activity. While an economic slowdown seems likely in the short term, the investment implications are less clear. The stock market tends to price-in economic weakness before it happens, which may have already occurred with the bear market in the first half.1
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The Labor Market Appears Undeterred, At Least for Now – If an economic slowdown is indeed underway, the U.S. jobs market has not received the memo. The U.S. economy continues to have an abundance of jobs available, with 10.7 million unfilled jobs as of June 2022. Before the pandemic took hold in February 2020, there were 7 million job openings in the U.S. – which was largely considered a very strong figure. Workers in the U.S. economy today are not having a difficult time finding new work when they leave a job or are laid off – a typical unemployed worker had been out of a job for 8.5 weeks as of July 2022, which is down from 14.4 weeks in July of last year. Earlier in the pandemic, economists worried that the jobs market would follow a similar pattern as it did post-2008 Financial Crisis when unemployed workers spent an average of 27 weeks out of a job. This backdrop of plentiful jobs comes as layoffs are rising slightly, though they remain at low levels historically. Job-openings rates across many segments of the economy are higher than they were pre-pandemic, and there are still approximately two job openings for every unemployed person looking for work.3
The Market for Initial Public Offerings (IPOs) Dries Up – At the end of 2021, the IPO market had just completed a historic 18-month run. Interest rates were low, the U.S. economy was experiencing surging growth in its pandemic recovery, and the appetite for high-growth, sometimes unprofitable companies was high. From January to August 2021, IPOs raised approximately $100 billion. The first half of 2022 looks wildly different. The war, inflation, and a hawkish Federal Reserve have sapped the ‘risk-on’ attitude of many investors, and the IPO market has dried up in the process. Through mid-August, traditional IPOs had only raised $5.1 billion, compared to the $100 billion over the same period last year. The last time the IPO market was this weak was 2009 when the economy was still badly bruised from the 2008 Financial Crisis. In a sense, the evaporation of IPO enthusiasm corresponds with what we would expect in a bear market, and it also could be a sign that excess risk and over-inflated valuations are getting flushed out of the system.4
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