A new dashboard to consider for signs of a new market cycle

Our Global Market Strategy team is examining a new set of indicators to gauge when a new market cycle may be ready to begin.

Chuck Noland, Tom Hanks’ character in the movie Cast Away, may have perfectly captured the mood we need to bring to these challenging times, when he said, “I gotta keep breathing. Because tomorrow the sun will rise. Who knows what the tide could bring?”

In keeping with that positive, forward-looking mindset, we are initiating our Roadmap to Recovery: Start of the New Cycle dashboard. The dashboard highlights the indicators we will be watching to determine the efficacy of the policy responses to the coronavirus — medical, monetary, and fiscal — and to assess whether a new business and market cycle is emerging.  In our view, the path to a new cycle would become evident from 6 key indicators.

Source: Novel Coronavirus data is daily from December 31, 2019 to March 24, 2020. Source: WHO and FactSet Research Systems.

China’s number of news cases has peaked, but the number globally continues to increase.  A bending in the curve of new cases will be a critical first step towards resuming economic activity.

Source: Bloomberg, as of March 24, 2020. 5y5y Forward Breakeven is a measure of expected inflation (on average) over the five-year period that begins five years from today. The DXY Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners’ currencies. Indexes are unmanaged and cannot be purchased directly by investors. Past performance does not guarantee future results.

In our view, deflation is the worst of all outcomes for risk assets because as prices fall then profits fall and then wages fall, and the vicious cycle begins anew.  We are watching for signs that the massive policy support is helping to stabilize inflation expectations and ease the strength of the US dollar.

Source: FactSet Research Systems, as of March 24, 2020. The Bloomberg Commodity Index is calculated to reflect commodity price movements across a variety of commodities. Indexes are unmanaged and cannot be purchased directly by investors. Past performance does not guarantee future results.

We are watching commodity prices for signs that policy support is stabilizing the dollar and easing the pressure on the commodity complex as well as for an indication that economic activity is beginning to resume. 

Sources: Barclays Live, 3/24/20. The Bloomberg Barclays U.S. Aggregate Bond Index is designed to measure the performance of investment grade bonds in the United States. The Bloomberg Barclays High Yield Index is designed to measure the performance of high yield (below investment grade) bonds in the United States. Option Adjusted Spread (OAS) is a measure of the spread (or difference in yield) between a bond index in this case and Treasuries of comparable maturities. Indexes are unmanaged and cannot be purchased directly by investors. Past performance does not guarantee future results.

The corporate bond market is often viewed as the “canary in the coal mine” for the global economy and the equity markets. True to form, spreads have widened significantly during this period of significant economic and financial market disruption. The Federal Reserve is providing significant support to the corporate bond market and the federal government is actively working to provide support to the nation’s businesses. We are watching for signs that conditions are easing, and corporate bond spreads are steadying.

Source: Bloomberg, as of March 20, 2020. The bond market is represented by long-term Treasuries; the stock market, by the S&P 500. The S&P 500 Index is a market-capitalization-weighted index designed to measure large capitalization stocks in the United States. Past performance does not guarantee future results.

The bond market continues to do better than US stocks.  We think a turn in the stock to bond ratio would be a positive signal that investors and the market are beginning to price in a resumption in economic activity.

Source: Data represent what direction members feel the stock market will be in over the next 6 months. American Association of Individual Investors (AAII Survey), as of March 20, 2020.

Markets have been pessimistic overall, to varying degrees, since the contagion became global. There is no sign we have reach peaked pessimism yet, but a bottoming in equity allocation tends to be a positive sign for markets.

Conclusion: A positive note

On a positive note, we saw modest improvement amid a sizeable policy response on the monetary and fiscal side on March 24 that helped inflation expectations, the dollar, commodity prices, and credit spreads all start to move modestly in the right direction. While this isn’t an all clear signal, we will be watching closely for more signs of improvement from here.

We will be monitoring these indicators daily and will be sending out regular updates.

Important Information

A credit spread is the difference between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating.

The stock-bond ratio is calculated by dividing the S&P 500 divided by the U.S. Long-Term Treasury Bond Index. As the ratio rises, stocks do better than bonds, and that can be considered evidence of a coming recovery.

The opinions referenced above are those of the authors as of March 25, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.  In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions. Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Brian Levitt is the Global Market Strategist, focusing on North America, for Invesco. He is responsible for the development and communication of the firm’s investment outlooks and insights.

Mr. Levitt has two decades of investment experience in the asset management industry. In April 2000, he joined OppenheimerFunds, starting in fixed income product management and then transitioning into the macro and investment strategy group in 2005. Mr. Levitt co-hosted the OppenheimerFunds World Financial Podcast, which explored global long-term investing trends. He joined Invesco when the firm combined with Oppenheimer Funds in 2019.

Mr. Levitt earned a BA degree in economics from the University of Michigan and an MBA with honors in finance and international business from Fordham University. He is frequently quoted in the press, including Barron’s, Financial Times and The Wall Street Journal. He appears regularly on CNBC, Bloomberg and PBS’s Nightly Business Report.

Timothy Horsburgh is an Investment Strategist at Invesco. In this role, he develops and communicates economic outlooks and investment insights. Additionally, he researches and creates thought leadership pieces to help articulate the firm’s thematic viewpoints.

Mr. Horsburgh joined Invesco when the firm combined with OppenheimerFunds in 2019. He began his career with OppenheimerFunds in 2010 and worked with the investment strategy team. Previously, he worked in roles in the US and Asia. He has been quoted in the press, including in the Financial Times and USA Today. He has also appeared on CNBC and Bloomberg and spoken on Bloomberg Radio.

Mr. Horsburgh earned a BA degree in both economics and government from Cornell University in Ithaca, New York. He is a Chartered Financial Analyst® (CFA) charterholder and holds the Series 7 and 63 registrations.

Talley Léger is an Investment Strategist for the Global Thought Leadership team. In this role, he is responsible for formulating and communicating macro and investment insights, with a focus on equities. Mr. Léger is involved with macro research, cross-market strategy, and equity strategy.

Mr. Léger joined Invesco when the firm combined with OppenheimerFunds in 2019. At OppenheimerFunds, he was an equity strategist. Prior to Oppenheimer Funds, he was the founder of Macro Vision Research and held strategist roles at Barclays Capital, ISI, Merrill Lynch, RBC Capital Markets, and Brown Brothers Harriman. Mr. Léger has been in the industry since 2001.

He is the co-author of the revised second edition of the book, From Bear to Bull with ETFs. Mr. Léger has been a guest columnist for The Big Picture and for “Data Watch” on Bloomberg Brief, as well as a contributing author on Seeking Alpha (seekingalpha.com). He has been quoted in The Associated Press, Barron’s, Bloomberg, Business Week, Dow Jones Newswires, The Financial Times, MarketWatch, Morningstar magazine, The New York Times, and The Wall Street Journal. Mr. Léger has appeared on Bloomberg TV, Canada’s BNN Bloomberg, CNBC, Reuters TV, The Street, and Yahoo! Finance, and has spoken on Bloomberg Radio.

Mr. Léger earned an MS degree in financial economics and a Bachelor of Music from Boston University. He is a member of the Global Interdependence Center (GIC) and holds the Series 7 registration.

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