Financial conditions have tightened significantly resulting in higher costs (higher interest rates/credit spreads/stronger USD) which is meant to reduce aggregate demand and consumption to bring aggregate demand back in line with the aggregate supply of goods and services in the global economy.
This process will reduce inflation back to Central Bank inflation targets. Changes in the Financial Conditions affect the Business Cycle/Liquidity cycle (borrowing/lending). Tightening cycles have tended to last 24 months. It is expected that growth in the economy will slow as well.
However, it takes a while to see the impact across the entire economy, company earnings, and inflation (which is a lagging indicator) and impact the expectations across all asset markets and borrowing and lending decisions.
We have looked at the last 11 periods in which the ISM PMI survey (proxy of GDP growth and aggregate demand) and impact of financial conditions (from 9 months prior) to determine the impact on equity markets and if we have reached a bottom. As of the closing price on Friday, we are down ~23% on the S&P 500 from the peak.
We note that the ISM PMI has slowed significantly in the past 4 months and try to model out based on past episodes where the path may take us. We examine other leading indicators as well. See below for our research on the topic.