Previous Research FII Sectorial Flows India: June 2023 Update
The latest inflation data for June indicates a significant decrease in inflation across various components, which has led to a surge in market indexes. The current conditions are favorable for a market rally. On one hand, the economy is stable, with record-low unemployment rates and expanding GDP. On the other hand, inflationary pressures are easing, resulting in increased asset valuations across the board.
Now, the question arises: what can we expect for future valuations, and is there a way to estimate them? One approach is to plot valuations against inflation. The following graph illustrates the relationship between the S&P500 Shiller PE ratio and core inflation, highlighting both the past inflationary cycle of the 1970s and the current cycle.
The current cycle bears striking similarities to the 1970s cycle in various aspects, such as core inflation, unemployment rates, stimulus measures, and eventual peak inflation. During that time, valuations exhibited a certain pattern in response to inflation, and the present cycle has followed a similar trajectory. By projecting valuations today using the reference from the past, it’s likely that valuations will soften before experiencing another surge.
Currently, valuations measured against core inflation are elevated compared to historical data. This indicates that the market anticipates no decline in earnings and expects a 2% inflation rate in the future. However, any deviation from these assumptions is likely to trigger a market correction. It is advisable to closely monitor the upcoming quarterly earnings as they will determine whether the expectation of no earnings decline remains valid.
– Airtham Research
Can US Skip the Recession?
The most recent labor market data paints a concerning picture of overall weakness. Typically, the effects of changes in interest rates take some time to ripple through the economy. Historically, this lag has been around 18 months. Interestingly, this pattern held true as, precisely 18 months after the initial rate hike in March 2022, we are now witnessing the visible impact this month. The Federal Reserve consistently raised rates throughout 2022, suggesting that the consequences of these consecutive hikes will continue to materialize as the year unfolds.
SP500 & Inflation Update: Aug 2023
Airtham Macro Research: The July headline CPI release followed predictions of a slight increase, yet the actual magnitude was less significant than anticipated. This outcome sparked optimism within the market, leading to a surge in activity and speculation of a potential pause in rate hikes. However, this optimistic rally was short-lived as market participants quickly adjusted their expectations. The weaker-than-expected inflation reading meant a potential decline in economic demand. This perspective gains support from jobless claims data released a few days back, that showed claims rising to a 1.5-year high. Consequently, there's now a debate over whether further inflation reduction is beneficial or detrimental to the markets.
What’s Happening to US Tax Receipts?
One of the most crucial indicators for gauging the health of a country lies in its government tax receipts. When tax receipts rise in tandem with economic growth, it signals a thriving nation. Conversely, economic downturns often witness an accompanying decline in tax receipts. However, what's truly concerning is when tax receipts decline despite a healthy and expanding economy.