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Will the stock market crash? JPMorgan says to pay attention to these 3 indicators

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The S&P 500 is down nearly 19% this year, while tech Nasdaq The Composite is down about 28% since the start of 2022.

In a note last week, strategists at investment bank JP Morgan outlined three key indicators for market participants to watch as they try to navigate more turbulent waters in the coming months.

Money supply M1 and PMI

The first reading that JP Morgan analysts looked at was the M1 money supply, which takes into account all the money in circulation in the US in the form of cash or bank deposits.

M1 is controlled by the Federal Reserve’s monetary policy. Its relationship with another set of indicators – purchasing managers’ indices (PMIs) – was cited in a JP Morgan note as an area to watch.

While analysts said a PMI cut was more likely, leading indicators “were not unanimous on the extent or duration of the softness.”

“Real M1 is likely to remain under pressure as inflation in the Eurozone remains high until the end of the year thanks to high gas prices,” the authors of the note note. “In contrast, the core CPI (consumer price index) in the US is forecast to halve over the next six months.”

They added: “Although the level of nominal M1 is in line with the current PMI and does not indicate much further weakness in the PMI.”

While some uncertainty about the PMI outlook remained, analysts said further PMI softening was “not necessarily” a problem for equity markets.

“For the past two to three months, we have been thinking that ‘bad data flow will start to be seen as good,’ and we think that is likely to continue,” they said. “For example, last week’s very weak PMI in the US and a weak housing data stream were met with favorable equity trading on the day, contributing to this call.”

On another tentatively positive note, analysts at the banking giant said the report was “encouraging” when looking at the ratio of new orders to inventories.

“These rates are generally near the lower end of their historical ranges,” they said. “A backtest at current levels has given the market a strong return for six to 12 months.”

Earnings per share ratio

JP Morgan also analyzed the stock’s earnings per share (EPS) ratio and noted that it “appears to be holding up much better than the PMI would suggest.”

“A gap has formed over the past four months, with almost all sectors doing better than the PMI shows,” the bank’s experts concluded. “This is an unprecedented case, but it may remain so, given the tailwinds in the foreign exchange market, better profitability and pricing power, and very low interest costs.”

Perspectives of monetary policy

Equity markets have been heavily influenced by monetary policy cycles in recent months, with investors taking a more risk-on approach as they awaited tighter strategies from central bankers aimed at reducing inflation.

However, JP Morgan said in a note last week that it did not believe the market’s reaction to the Fed’s hawkish signals had taken hold.

“The Jackson Hole report remained underwhelming, which was the reason for the latest attack on risk reduction, but we don’t think that will happen,” analysts at the bank said, citing Fed chief Jerome Powell. speech at the annual central bank symposium.

“We continue to believe that September will be the last of the Fed’s outsized hikes, after which the Fed’s stance will become much more balanced.”

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