Swing and a miss!

Swing and a miss!  Stocks plummeted yesterday on weak manufacturing data, increasing fears of a recession.  Stocks quickly erased early gains when data showing a second month of contraction in manufacturing hit the tape.

MY TWO CENTS

1.  Our survey says:  The number that got traders in a tizzy yesterday was the Institute for Supply Management’s (ISM) Manufacturing PMI.  PMI stands for purchasing managers index which has been recognized as a highly reliable gauge of industry.  The index is constructed by surveying 300 supply management professionals across various industries.  Respondents are asked about conditions across ten key areas including new customer orders, production levels, employment, inventories, new export orders, etc.  Managers are asked if their activity in those key areas increased, decreased, or stayed the same.  Responses are tallied up to calculate what is referred to as  a diffusion index.  Index readings above 50 represent growth and readings below represent contraction.  What makes the PMI so important is its accuracy.  Remember that manufacturing managers are rational business decision makers relying on numbers, not sentiment, to make decisions.  When orders from customers slow down they will rationally slow down orders of supplies and even employment growth.  Respondents are the ones who are on the ground and are often the first ones to feel the effects of bumps in the road such as… say… tariffs and supply chain disruptions caused by the trade war.  While the index is a numerical outcome from the survey, respondents are able to add anecdotal information.  Guess what the most common theme of the responses were?  The trade war with China.  So it would make sense for sensible managers to begin to slow down their activity as orders are slowing and costs of foreign produced materials are going up because of tariffs.  Yesterday, the ISM Manufacturing PMIcame in at 47.1 down from last month’s read of 49.1.  That represents two consecutive month’s of contraction with this last read registering the lowest since June of 2009, when we were in the midst of the last recession.  Traders were smart to take note.

2.  Self induced coma.  While yesterday’s Manufacturing PMI missing Wall Street estimates appeared to have surprised investors, it really should not have.  There are many gauges of manufacturing activity coming from multiple credible sources and those numbers have been underwhelming for much of 2019.  Additionally, it is reasonable to assume that the trade war will have an affect on manufacturing and the strong dollar only makes things more difficult.  The US Dollar is strong versus other currencies because the US Economy is outperforming those of our trading partners.  Additionally, currencies are highly sensitive to interest rates and while rates are quite low in the US, they are outright juicy compared to the lower if not negative interest rates elsewhere in the world.  Higher interest rates means stronger currency as foreign investors must convert to US dollars to buy higher yielding US debt.  A strong currency makes US products more costly to foreign buyers, which is why the Trump administration is constantly lamenting its strength.  So why have investors largely ignored the writing on the factory wall for so long?  The main reason is that manufacturing, while it was once the mainstay of the US economic machine, only represents 12.5% of the US GDP.  Sure a decline is bad, but is bad enough to cause US economic growth to decline and cause a recession?  On its own, probably not.  I know I harp on this quite often, but consumer spending represent 2/3 of the GDP and they alone will have the largest direct effect on economic performance.  What is spooking traders at the moment is that these recently weak manufacturing numbers may have caught the attention of consumers.  If consumers start to pull back on spending due to a lack of confidence, they alone can slip the economy into a recession.  Last week’s Consumer Confidence number came in below expectations, falling almost 10 points from the prior month.  Are consumers finally noticing these numbers?  We will find out soon as we enter the best quarter for retail sales.

THE MARKETS

An early morning rally in stocks fell apart as stocks sold off aggressively as weak manufacturing PMI jolted traders.  The S&P500 fell by -1.23%, the Dow Jones Industrial Average dropped by -1.28%, the Russell 2000 sold off by -1.97%, and the NASDAQ Composite Index sunk by -1.13%.  Bonds and safe haven assets rallied while 10-year treasury yields slipped by -3 basis points to 1.63%.  Crude Oil continued its slide yesterday giving up -0.83% on fears of weaker future demand.

WHAT’S NXT

- ADP Employment Change is expected to show that +140k new jobs were created, representing a slowdown from last month’s 195k.  This is an important prelude to Friday’s government release.

- Richmond Fed President Thomas Barkin, Philadelphia Fed Head Patrick Harker, and New York Fed President John Williams will all speak today.

- Lennar beat earnings estimates by+ 20.9% this morning and we will hear from Bed Bath & Beyond after the bell.

ESCAPE THE FLORIDA HEAT

Drop in and visit me at either our Boca Raton or Miami offices this week.  Please reach out to set up an appointment.

daily chartbook 2019-10-02