With the US March CPI surpassing expectations and the market revising down the extent of interest rate cuts for this year, global stock markets are experiencing a noticeable decline. Will this lead to short-term corrections or potentially trigger a larger-scale collapse? To help investors grasp the forces driving global stock markets, MacroMicro provides an exclusive compilation of key indicators for global stock market analysis. Feel free to follow and stay updated at any time.
In this article, we highlight the following indicators from the collection:
- Equity Indices Above 200-Day Moving Average
- Stock Market Cap by Country
- Stock Market Cap-to-GDP Ratio by Country
- Stock Market Cap Divided by M2 Money Supply
- Net % of Central Banks Cutting Rates
- OFR Financial Stress Index (FSI)
- Taiwan Export Growth (YoY) vs. MSCI ACWI
- MM Global Recession Probability
- Citigroup Earnings Revision Index
- MM Economic Expectations Index
I. Market Sentiment: Are Stock Markets Getting Overheated?
▌1. Global Equity Indices Above 200-Day Moving Average
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Is the global stock market in overheated territory? For that, we can look at the percentage of major stock indices performing above their 200-day moving average. A ratio above 80% or even 90% signals overheated market sentient and potential corrections ahead.
Currently, around 60% of stock indices around the world is trading above the 200-day mark, and there’s notable variation among countries. As shown in the chart below, while over 80% of stocks on the Nikkei and Sensex is trading above the 200-day mark, the percentage in markets like Hong Kong, Brazil, Singapore, and China is below 50%.
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It’s also worth noting that overheating doesn’t necessarily always translate to risk. On the contrary, as long as the market rally is supported by healthy fundamentals and liquidity, pullbacks can actually present buy opportunities.
II. Valuation: Are Stocks Too Expensive? And Is that a Problem?
▌2. Stock Market Capitalization by Country
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The stock market capitalization of a country reflects its economic vitality and the attractiveness of its investment environment. Generally, a higher market cap indicates a larger weighting in the MSCI ACWI World Index. Currently, the top three stock markets are that of the US, China, and Japan.
Meanwhile, a fast-growing market cap indicates significant capital inflows into the country. Such is the case of India, where robust domestic consumption, relative political stability, and benefits from ongoing global supply chain shifts have attracted significant foreign capital. In contrast, Hong Kong’s stock market has been weighed down by China’s economic slowdown and geopolitical tensions, leading to a steady outflow of foreign capital. By market cap, the Indian stock market officially surpassed Hong Kong as the world’s fourth largest stock market (excluding Euronext) in December 2023, and the gap continues to widen.
▌3. Stock Market Capitalization-to-GDP Ratio
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We can also look at the market cap-to-GDP ratio, which measures stock market capitalization relative to GDP and can be used to assess whether stock prices are supported by solid economic growth. The ratio is also known as the Buffet Indicator, as Warren Buffet once commented that the ratio is a useful tool for gauging where stock valuations stand.
Currently, Taiwan, the US, and Japan have relatively high market cap-to-GDP ratios, at 275%, 188%, and 155%, respectively. Hong Kong’s market cap-to-GDP ratio stands at an even more astonishing level of over 1000%. But does this imply stocks in these markets are absolutely overvalued?
It's crucial to note that a country's stock market does not always mirror its economic structure. Also, constituents of major indices can dramatically change over time. For instance, the US stock market was once dominated by manufacturing and retail giants, but nowadays tech stocks have risen to become the dominant force in stock indices, creating a disconnect between the stock market and the broader US economy that is more service-oriented.
In Hong Kong’s case, many Chinese companies are listed in Hong Kong, but their production and operations are not in Hong Kong and thus not reflected in Hong Kong's GDP, leading to the market cap-to-GDP ratio of the Hong Kong stock market exceeding 1000%.
Therefore, when analyzing this ratio, it's essential to consider whether stock market composition aligns with the current economic structure.
▌4. Stock Market Cap Divided by M2 Money Supply
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In addition to using GDP to assess valuations, we can also divide stock market capitalization by M2 money supply to see whether easing/tightening monetary conditions are reflected in the stock market.
When a country adopts a more accommodative monetary policy, stock valuations might benefit and we see the ratio of market cap to M2 money supply rise, as seen in the US and Japanese stock markets after 2008.
On the other hand, despite multiple reductions in reserve requirements and interest rates since 2014 to boost liquidity, the same ratio has continued to fall in China, indicating that enhanced liquidity have not translated into inflows into the Chinese equity market.
III. Liquidity: How Are the Global Financial Conditions Looking?
▌5. Net Percentage of Central Banks Cutting Rates
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The net percentage of central banks cutting rates, calculated as the percentage of central banks whose last move was a rate cut minus those raising rates, is a useful indicator of global liquidity and financing conditions. A rising percentage indicates most central banks are in the easing camp. This means market liquidity will gradually improve with more capital flowing into the stock market. Lower interest rates also mean lower borrowing costs for businesses. Both are positive developments that boost the performance of the global stock market, as shown in rallies of the MSCI ACWI Index.
Global central banks, after aggressively tightening to combat inflation, are now adopting more accommodative policies to prevent economic downturns. While the timing of Fed rate cuts this year remains uncertain, other countries like Brazil and Peru have already begun easing. Switzerland took the lead among G10 countries by initiating rate cuts in late March, and the global percentage of central banks cutting rates has been increasing. Consequently, the stock market has already factored in expectations of rate cuts and anticipates improved liquidity conditions.
▌6. OFR Financial Stress Index
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The Financial Stress Index (FSI) by the Office of Financial Research (OFR) in the US incorporates financial variables from five categories: credit, equity valuation, funding, safe assets, and volatility. The index provides a comprehensive assessment of risks in global financial markets.
Benchmarked at zero, a higher reading indicates elevated financial risks, while a value below zero indicates the financial market is relatively safe.
Presently, the FSI remains below zero and is
