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Observations from the recent market turmoil

26 July 2021

In today’s Market Pulse, Chief Investment Officer Bernard Swords reflects on why concerns with the peak of growth have proven short-lived, as retail flow and strong earnings have quickly supported equity markets. Bernard addresses why he believes the peaking of growth is not a problem for further equity gains, which can also be justified by the earnings and guidance momentum we are seeing through this current earnings season.

  • One of the factors driving the recent growth scare was the prospect of passing the peak in growth rates. The ISM Manufacturing Index is one of the indicators that is closely followed as an indicator of the health of the US. It does appear to be peaking now.  Some people would say that if the growth rate is peaking then that is bad for equity markets.  We do not agree. Looking at data for the past 30 years, the equity market has continued to move ahead in periods following an ISM peak. More specifically, if we look at periods when the ISM has recovered from below 50 and then peaks but still remains above 50 (i.e. the economy remains in expansion) the S&P 500 was up in all them.  The average return in these ‘past the peak but still in recovery’ phases was over 30% (worth pointing out the average period here lasted 3 years). So the peaking is not the important thing – it is whether we remain in expansion after. Consensus forecasts indicate that not only will we be in expansion mode it will be well above trend.
  • An interesting feature of the recent turnaround was the source of flows on the recovery day. Retail investors accounted for nearly 90% of activity on the New York stock exchange on Tuesday. This is the second time in less than two months that a very weak down in the US market has sparked retail buying. We had been wary of the argument that post a strong start to the year there was potential for a correction along the way. We acknowledged that this could happen but felt that it was unlikely to be large enough to be able to add any value positioning for it. The performance around the two recent scares re-enforces that. The ‘buy the dip’ mentality is strong and it has fire power.
  • The result season has got off to a very strong start. It looks like it will be close to a record season again. The standout so far has been the changes to guidance. Close to 90% of companies that have reported so far have improved their outlook. There was a chance that we could have good second quarter results but that companies could make cautious outlook statements due to rising input costs or supply chain issues. This not turning out to be the case and earnings should provide strong support for further advances in equity markets.
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