Welcome to RBC’s Markets in Motion podcast, recorded September 18th, 2023. I’m Lori Calvasina, head of US equity strategy at RBC Capital Markets. Please listen to the end of this recording for important disclaimers.
Today in the podcast, three big things you need to know: First, the Misery Index (inflation plus unemployment) has fallen sharply since last summer, helping explain the surprisingly strong move in the S&P 500 this year. Second, deleveraging was one key theme that jumped out to us from RBC’s Industrials conference last week. Third, other things that jumped out from our high frequency indicators last week include the recent improvement in bottom-up 2023 S&P 500 EPS forecasts and the return of US equity fund inflows driven by passive funds.
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Let’s start with takeaway #1: monitoring misery has been helpful to understanding the stock market’s move this year.
- Last week one economic chart that caught our eye, which we haven’t looked at in quite some time, was the Misery Index, which is the sum of unemployment and inflation.
- The thing that jumped out to us the most was that it spiked to levels close to past recessions in the summer of 2022. Obviously, as inflation has moderated and labor markets have stayed resilient, this indicator has fallen sharply since last summer.
- We’re adding it to our list of indicators that help explain why the S&P 500 has been so strong in 2023.
- Even though a recession didn’t occur in 2022, in some ways recessionary conditions were in place. We’ve talked about this before when we’ve pointed out how closely the S&P 500 has traded with trends in consumer sentiment over the past year, which hit recession type extremes in 2022 as well.
- We continue to view 2023 pricing in the S&P 500 as a classic recovery trade in this regard. We’re keeping a close eye on the Misery Index indicator going forward, and note that it has ticked up a little as summer has come to an end as investors have started to worry about a possible resurgence in inflation.
Moving on to takeaway #2: Deleveraging Was One Theme That Jumped Out From Our Industrials Conference
- While we weren’t personally able to attend RBC’s Industrials conference last week, we kept a close eye on the commentary coming out of our analyst teams. The thing that jumped out to us the most from a macro perspective was the emphasis on deleveraging. This occurred alongside a healthy amount of discussion on buybacks and M&A.
- The commentary on deleveraging isn’t too surprising given the buy-side’s focus on the impact of higher interest rates for longer in our recent meetings. Deleveraging has enjoyed a fairly consistent amount of attention in recent years among all public companies, and we expect it to remain in focus in coming months and 2024 comes into view as the impacts of Fed policy are debated.
Wrapping up with takeaway #3: What Else Jumps Out From Our High Frequency Indicators. Both are positive data points for the stock market and help explain recent resiliency.
- First, 2023 EPS forecasts are moving up. Bottom-up 2023 S&P 500 EPS forecasts moved up a bit in August. This is unusual in years where EPS forecasts started out the year too high. Normally, consensus forecasts are stable after mid year, and don’t move up this late.
- Second, US equity funds are starting to see inflows again. US bond inflows have been steady, but we’ve still started to see inflows to US equity funds return.
- This has occurred as flows to EM, China, and Japan have weakened.
- Both Large Cap and Small Cap flows have improved, and within each of those improvement in passive flows has been most noteworthy.
- Within Large Cap, there’s also been a much stronger improvement in Growth than Value.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.