These chartbooks capture market themes which presently exist in a vacuum from which the oxygen has been sucked out by fears over the sell-off in bonds, its drivers and implications for monetary policy, and the AI story, which continues to capture the attention of bulls and bears alike. These two themes will continue to dominate the main market narrative as speculation intensifies over whether the data are pulling the Fed towards tightening, perhaps as early as this month, or whether it will ride out the storm with no change in rates. In the AI story, meanwhile, the next big test of the bull market’s strength and resilience will be the much-awaited IPOs of the frontier labs—OpenAI and Anthropic—which require significant and ongoing injections of capital to stay alive, even as they remain the principal conduits through which AI is transmitted to the real economy.
Read MoreGlobal leading indicators deteriorated further at the end of Q2, with revisions pointing to a broadening weakness that has been building since March. This could still reflect the residual effects of the disruptions following the US-Iran war, but the signal is clear nonetheless. A more hawkish tilt in global monetary policy, as inflation risks have resurfaced, has likely contributed to the weakness, alongside uncertainty over the resilience of global consumer spending as real income growth comes under renewed pressure, and a fragile outlook for investment outside AI.
The silver lining is that the accelerated downturn in the headline LEI diffusion index masks increasing divergence across countries, with several key economies still remaining in expansion territory, as shown in the first chart below. The bad news for investors, however, is that—as I explain below—the probability of negative equity returns over the subsequent six months has increased markedly following the LEI diffusion index's recent move below zero.
Read MoreI have augmented my US equity sector chartbook with two more similar chartbooks; a simple one with the four major factors—value, momentum and minimum volatility—and one with global country equity indices ex-the US. The factor chartbook uses the iShares global factor ETFs—IWVL, IWMO, MVOL—and VEU for a non-US factor. The global chartbook also uses iShares country ETFs. I have also corrected some errors in the cross-calculation statistics and the corresponding Z-scores.
The latest versions of the chartbooks can be found here (US sectors), here (global beta ex-US) and here (Factors), with there accompanying portfolio statistics here here and here.
Read MoreI am combining the April and May updates to the LEI Chartbook into a single edition, which, in hindsight, seems like a good decision. Leading indicators showed broad-based weakness in April, but I was sceptical that this deterioration would survive revisions. The May batch, meanwhile, confirms the weakness—and then some. Revisions could still alter the story, but as of May the key message is clear: global LEIs are now on the cusp of a broad-based downturn, having otherwise remained resilient in the face of geopolitical uncertainty and, in particular, volatile US economic and foreign policy.
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