Short-term factors driving equities

monitoring fast-moving factors influencing US stocks

What is driving US stocks?

In summary

• we are monitoring here the relationship between stocks and investor sentiment, which is measured by the recent trend in corporate bond spreads of different credit qualities (investment grade vs high yield)
• such relationship is solid lately, as measured by the 1-month daily correlation at 0.63: a positive and fair reading; this means that the investors' positive sentiment (= riskier HY spread outperforming safer IG) and falling stock prices have broadly moved in the same direction, showing a lack of causal relationship between the two variables over the past month

IntroA number of different, independent variables can - at traits - influence equities in particular ways. We monitor here the 1-month daily relationship between three different variables of influence and US equities, measured via the Stoxx 600 index.

Daily news & policy uncertaintyFirst, we look at the daily newsflow (measured via the policy uncertainty index in the US) as proxy of global and local political news or as immediate source of new uncertainties. A high (negative) correlation with stocks should indicate that higher uncertainty is pushing stocks down while lower uncertainty would help stocks go up. A positive correlation would indicate no congruent relationship.

Investor sentimentSecond, we look at investor sentiment as measured by the spread ratio between US investment grade (=better quality) corporate bonds and US high yield (=lower quality) corporate bonds. This is a solid, more grounded measure of investor sentiment vs other more volatile sources. A high (negative) correlation with stocks should indicate that a more conservative investor sentiment is pushing stocks down while a more benign risk-on attitude would push stocks up. A positive correlation would indicate no congruent relationship.

Short-term yieldsThird, we look at short-term yields as measured by the German 2-year Bund yields (as risk-free proxy for the US). Such yields are a proxy for a plethora of macro drivers and would be driven by short-term inflation expectations (=more inflation, higher yields), monetary policy actions by the ECB (expected rate hikes would push yields higher, and viceversa expected rate cuts) and growth prospects (=faster growth, higher yields).

Correlations here can go in different directions: a high negative correlation with rising stocks should indicate euphoria for rate cuts announced by the ECB and with falling stocks conversely there would be fear of rate hikes or inflation; a high positive correlation with rising stocks would indicate faster growth prospects, and with falling stocks would indicate concerns for a growth slow down.

Market implicationsUnderstanding what have just been the likely sources of short-term influence onto the stock market would help investors see what is likely to continue driving stocks in the next few sessions, offering ideas for short-term, tactical allocation in investment portfolios.

Long-term factors driving equities

monitoring fundamental factors influencing US stocks

What is driving US stocks?

In summary

• we are monitoring here the relationship between stocks and company earnings , which is measured by the announced and expected growth in earnings by the market consensus
• such relationship is very robust lately, as measured by the 3-month correlation at 0.99: a strong reading; this means that theearnings have been a key fundamental driver of stock prices (as they should normally be) over the few months

IntroA number of different, independent variables can - at traits - influence equities in particular ways. We monitor here the 3-month daily relationship between three different fundamental variables of influence and US equities, measured via the Stoxx 600 index.

The difference between the variables considered in the chart above (right) vs the chart on the left hand-side of the page is that the variables considered here are generally expected to be fundamental drivers of stocks over the long-term.

Expected growth via PMIsFirst, we look at the influence of upcoming, expected economic growth vs stock prices. The purchasing manager index (PMI), here monitored in its composite version, is a proxy for expected growth over the next few months. We should normally see a positive correlation between rising PMIs and rising stocks, or falling PMIs and falling stocks.

Corporate earningsSecond, we look at corporate earnings, a measure of profitability for companies on the stock exchange. Earnings have historically acted as a key driver of stock returns over the long term. A positive correlation with stocks should indicate that better, faster earnings growth drives stocks up, and conversely slower, disappointing earnings would drive stocks down.

Long-term yieldsThird, we look at long-term yields as measured by the German 10-year Bund yields (as risk-free proxy for US). Such yields are a proxy for a plethora of macro drivers in the long-term and would be driven by long-term inflation expectations (=more inflation, higher yields), later actions in the monetary policy by the ECB (expected rate hikes later in time would push yields higher, and viceversa expected rate cuts) and long-term growth prospects (=faster growth, higher yields).

Correlations here can go in different directions: a high negative correlation with rising stocks should indicate euphoria for rate cuts coming up in the future by the ECB and with falling stocks conversely there would be fear of future rate hikes or long-term inflation; a high positive correlation with rising stocks would indicate faster growth prospects in the distant future, and with falling stocks would indicate concerns for a future slow down.

Market implicationsUnderstanding what act as likely sources of long-term influence onto the stock market would further enrich investor views on what will likely continue to drive stocks, offering ideas for long-term, strategic allocation moves in investment portfolios.