The 3 Best Indicators To Track Global Stocks
Thu, Aug 28 | by Zacks Investment Research
As Zacks' new Chief Equity Strategist, I wrote a piece titled "The Only Investment Indicator You Need" for the 2012 Weekend Wisdom series.
My thesis was: "Keep it simple." Making money boils down to mastering one topic. You must correctly size up "big picture" macro risks that hit stocks hard at times. What was that sole indicator? Monthly U.S. jobs reports. This follow-on short is "The 3 Best Indicators to Track Global Stocks".This complements the 2012 insight. It doesn't replace it. Monthly U.S. jobs reports are the MOST important data to stay bullish (or get bearish). First: Track consumers.
Global Indicator One: Consumption Growth
Hedge Fund Research Inc. (HFRI), based in Chicago, produces over 100 indices. To know where smart money makes returns, consult this data. Table 1 shows that consumer growth beat the runner-ups of corporate profits and the unemployment rate (one period ahead) easily. If the U.S. consumer is on, global demand gets a leg up.
Time for a brief statistics lesson: A correlation number in Table 1 that gets toward 1 is a positive one-for-one returns relationship. A correlation that gets towards -1 is a negative one-for-one relationship. Zero correlation signals no relationship.
Table 2 shows U.S. consumption growth has a tight fit to U.S. returns earned by equity market neutral hedge funds. Outside the U.S., Emerging Market style hedge funds show U.S. consumer activity matters too, but not as strongly.
Global Indicator Two: Bank of England (BoE) Minutes
After consumers, we looked into the role GDP growth played in generating returns.It's a 3-month macro forward look that matters most to hedge fund investors... and to you! If you want a complementary take on matters outside the U.S., consult the U.K. authorities. That means getting a hold of the Bank of England (BoE) minutes.
I pulled this excerpt: "The recent trend of activity growth in the United Kingdom at or slightly above longer-term averages had continued, and sustained economic momentum was looking more assured." -- July 2014 sub-section on Money, Credit, Demand and Output.
BoE policy stayed the course. Stick to your guns. The BoE says the global bull market is on track. That takes us to a final indicator: Markit Purchasing Manager Indices (PMIs).
Global Indicator Three: Markit PMIs
According to Markit's website, PMI data are based on monthly surveys of carefully selected companies. These provide an advance indication of what is really happening in the private sector economy by tracking variables such as output, new orders, stock levels, employment and prices across the manufacturing, construction, retail and service sectors.
"During the depths of the recession, the headline PMI figure for the dominant service sector ... was a key indicator to highlight the impending severity of the recession in the immediate aftermath of the collapse of Lehman Brothers in late 2008. The PMI has also been very quick off the mark in heralding recovery." -- Gráinne Gilmore, The Times, January 2010
That sums it up.
Summing Up the Global Landscape
To sum up the state of any global landscape, check the indicators.
• First, July U.S. jobs came in at +218K. That's well above +150K needed to beat U.S. population growth. Check.
• Second, U.S. GDP grew +4.0% in Q2. Consumption growth was +2.5% of that. Consumer growth above +2% is solid. Long bias hedge fund returns are up. Check.
• Third, the Bank of England said activity indicators were 'slightly above' long-term trends. That's positive language for stocks. Check.
• Fourth, the composite eurozone PMI trend is up. The May 2014 Eurozone composite PMI was 52.2. June was 52.8. July was 53.8. The trend is up and indicates expansion. Worry comes via turns in Italy, Germany, and France PMIs. China's PMI is in expansion territory. Ditto for Japan and the U.S. and many others. Check.
My conclusions? I don't detect worry this month outside of Europe. Sleep soundly. All indicators say it is mostly a global bull market. Overweight stocks with a yellow flag on Europe. C'est finit? No! Keep vigilant. To catch turns in data, a global investor must rinse and repeat each month.