The indicators followed here were giving a positive signal for equities and other risk assets in late summer 2012:
Global real narrow money expansion was rising, suggesting an economic pick-up from late 2012 – see here.
A global “double-lead” indicator calculated here from OECD country leading indicator data had turned up, supporting the monetary forecast – here.
A large gap had opened up between global real money expansion and industrial output growth, implying “excess” liquidity available to flow into markets.
Central banks were easing policies and signalling more to come
Investors were unduly pessimistic about economic prospects and positioned defensively.
The current message from the same indicators is more ambiguous:
Global real money growth has moderated since late 2012 though remains at a level historically consistent with solid economic expansion.
The double-lead indicator has also declined – see below.
Global real money expansion remains above output growth but the gap has narrowed, suggesting a less favourable – but not unfavourable – liquidity backdrop.
Central banks are still easing but may scale back further stimulus in response to better economic news and market buoyancy.
Many but not all investors are optimistic and constructively positioned.
The judgement here, therefore, is that a reduction in exposure to equities and other risk assets is warranted currently and a shift to defence should be considered if the real money / output growth gap closes.
The global double-lead indicator fell further in March and is starting to diverge negatively from real money expansion – see chart. Real money has led recent industrial cycle turning points by an average of six months; the indicator has led by five months. The forecasting approach here places greater weight on monetary trends but both measures suggest that the acceleration phase of the cycle – during which equities typically do best – is ending.