Stock valuations, European gloom and bullish Japan

This week's chart covers the following topics:

• Stock valuations according to GARP
• The Taylor Rule and where rates “should” have been
• Investors’ steady inflows into turbulent markets
• A bullish trajectory for Japanese confidence
• French and German gloom, Asian optimism for PMIs
• Changing perceptions of ECB rate peaks using Euro short-term futures

Stock valuations according to GARP

This chart requires a subscription to the Macrobond/FactSet Equity Factor Aggregates add-on database.

It’s a "stock picker’s market, " Barron's suggested earlier this year. This investing cliché suggests that selecting growth stocks with appealing valuations will be paramount in an environment where broader indexes are stagnant. (Indeed, the S&P 500 finished October down 2 percent amid earnings-related selloffs in some high-profile names.)

The strategy in our scatterplot visualisation is “growth at a reasonable price,” or GARP. Using FactSet data, we created buckets of large-capitalisation US stocks by sector, searching for relative undervaluation. Our “earnings growth” x axis compares estimates for the next 12 months to the 12 months after that; our “historic price-earnings valuation” y axis compares the forward P-E ratio’s deviation from the 10-year average.

The Taylor Rule and where rates “should” have been

This chart can be applied to different countries using Macrobond’s change region functionality.

When assessing Federal Reserve policy, it’s interesting to look at the Taylor Rule , created by a Stanford University economics professor. It’s a rough guideline for a central bank’s response to inflation; typically, formulations include the concept of a “natural” rate of interest, based on factors including price levels and real incomes. The Taylor Rule also usually calls for a relatively high rate when inflation is above target.

This chart compares Fed policy to two formulations of the Taylor Rule based on different assumptions about the natural rate of inflation.

Since the financial crisis, and especially since the pandemic, the Taylor Rule has usually called for tighter policy than the Fed delivered. (Taylor himself was often a critic of what he perceived as the Fed’s “easy money.”)? As inflation has slowed after the Fed’s historic tightening cycle, the rates have converged.?

Investors’ steady inflows into turbulent markets

This chart requires a subscription to the EPFR Fund Flow add-on database .

This chart tracks the evolution of global fund flows into equity and bond markets over the past two decades by calendar year.

Even with the S&P 500 sliding since July as the market digested “higher for longer” Fed policy, and even as the bond rout continued through 2023, investors continued to place money in both asset classes until very recently, as our chart shows. It wasn’t a repeat of the excitement about equities in 2021-22, but cumulative flows for the year are still quite positive.

Macrobond News

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3. And 25 other new time series, from Chile to Poland.

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