Currencies

Can we value a security against the trend of the economy?

In short yes - for certain benchmark securities.

Think about securities that capture the trend of the whole economy, like the S&P 500 or the US 10y Treasury.

These large benchmarks are linked to the trend of the economy at large, so it’s fair to assume that when the economy moves, their underlying value changes too.

We have several measures of economic growth, the most timely being New Order PMIs which gauge the trend of new business for companies.

Taking SPX as an example, when PMI New Orders goes up one can expect better trend from earnings, and vice versa.

Using PMIs as an anchor of fundamental value, we can begin to gauge value for SPX by means of a regression.

Let’s say that for any 5-points of shift in PMIs, SPX usually goes up 10%. However recently, the PMIs stayed flat but SPX rose 6%. Then we can claim that the SPX should be 6% lower - it is 6% overvalued!

Here is how this looks like in practice:

premium to pmi fair value

We use these indicators to gauge moments when price action is out of line with the broad economy.

Can we value a security against the trend of the economy?

Button to Twitter
Button to Facebook
Button to Linkedin

Button to Twitter
Button to Facebook
Button to Linkedin

Join our newsletter

Subscribe to our daily market brief and get new trade ideas every single day

TOGGLE logo

Your AI Investing Copilot

EN
App Play store download

Android coming soon

Product

Learn

About us

Resources

© 2023 Knabble, Inc.

Facebook logo
Linkedin logo
Instagram logo
Twitter logo
Youtube logo
Reddit logo