4 Key Charts to Survive a Market Crash

Following last week's unexpected rise in the U.S. unemployment rate, which triggered the Sahm Rule recession threshold, the global stock market underwent a market crash on August 2nd and August 5th. This has unnerved investors. Our latest article highlights four key indicators to help you assess whether the market is headed for a deeper correction or if this is just a temporary setback.

I. Manufacturing Cycle: The Leading Indicator of Stock Market and Global Recession

Manufacturing, being highly sensitive to economic cycles, acts as a bellwether for the global economy. When market demand rises, companies increase production to maximize profits, leading to inventory restocking throughout the supply chain and driving an upswing in manufacturing. Conversely, when demand starts to decline, customers cut back on orders, companies reduce production, and suppliers work to clear out inventories, resulting in a downturn in the manufacturing cycle. Such declines in the manufacturing cycle have even contributed to global recessions, as seen in 2000 and 2008.

Based on the rationale above, the manufacturing cycle serves as a useful barometer of global economic conditions. Historically, when the MM Manufacturing Cycle Index starts to decline, global stock markets would see significant corrections roughly 2-3 quarters later. As demand starts to slow, inventories passively build up as businesses need time to adjust production to waning demand, which then leads to the downturn of the MM Manufacturing Cycle Index to decline from a high point.

We are currently in the mid-to-late stage of the global manufacturing cycle’s upswing phase. With an upcycle typically lasting around 5-8 quarters and the current upswing starting in early 2023, we are now in its fifth quarter. We anticipate the expansion phase will continue into Q3. Moving forward, it is essential to watch for peaks in the manufacturing cycle index, as a reversal could signal potential slowdowns or significant corrections in the stock market.

II. Taiwan Exports: Export Growth Likely Peaked Given High Base from AI Boom

Driven by Generative AI, tech stocks have been the primary driver for the MSCI ACWI index’s bull run. Export momentum in Taiwan, a major chip manufacturing hub and supplier of electronic components, can thus reflect global trade trends and health of the electronics sector, which serves as a leading indicator for broader stock market movements.

Historically, when the 3-month moving average of Taiwan’s annual export growth rate peaked against high bases and begin to decline, the global stock market would reach a peak as early as six months later. Last year, robust demand for consumer electronics and AI components fueled a strong export performance, resulting in high bases in terms of absolute export values. Due to the base effect, Taiwan's export growth seemed to have peaked in Q2 this year. This is also the reason why technology stocks began to decline starting from Q3.

That said, historical data suggests that if export momentum remains robust, many stocks can still perform well even if the broader market doesn't rally to new highs. Conversely, if demand weakens and export growth slows consecutively, which also confirms the start of a manufacturing downturn, the chances of stock market corrections will rise significantly.

III. Share of US Industries Posting Strong EPS Growth: Monitor Overheating Risk

As a large majority of suppliers worldwide cater mainly to U.S. brands, data on the earnings per share (EPS) of U.S. equities also provides insights into global stock market trends. According to our analysis...

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