THE ISM COULD BE PREDICTING TOUGHER SLEDDING FOR THE S&P 500
It might be time for investors to temper their expectations for future equity returns. That’s what the ISM Manufacturing data could be forecasting given its recent correlation with the S&P 500. According to Jeffrey Kleintop of LPL (via Bloomberg) the pace of change in the ISM’s diffusion index has a very close correlation with the year over year change in the S&P. I went into the Fed database to run the numbers and the correlation is indeed tight:
This doesn’t spell impending doom, but it does mean the red hot returns of the last few years are likely set to slow. With the diffusion index at its 20 year highs there is a very small chance that we don’t begin to see mean reversion in the coming quarters. Of course, this doesn’t mean we won’t continue to see year over year gains and economic expansion, but it does mean the pace of gains in the S&P will become more muted as expectations of robust economic growth decline.
I am following this indicator as well. According to it equities may even have some upside to catch before the pace mean-reverts.
InvestorX
Good payrolls. Now for ism in an hour….
agreed, but remember ben b. and his big chopper
Improving economy, ZIRP & QE II and very high investor confidence….market chugs higher. What was shocking is yesterday we had a couple of Fed governors state interest rate might need to rise. Shocking…why not just keep real interest rates negative and let the party continue.
the above chart is interesting, but it leaves out a third variable, namely gdp. see http://1.bp.blogspot.com/-y_2jvfNsSZQ/TZXbvt7gViI/AAAAAAAAE1A/CH8HXOLXBy4/s1600/NAPM+vs+GDP.jpg which would seem to show that gdp will rise based on ism.
now, my bet is that if we have a rising gdp, we will have a rising s&p500
This isn’t predicting a decline in the S&P. It’s just predicting a slowing in the rate of the climb.
I have seen this chart and others referring to the correlation of ISM and GDP, but as Cullen points out the trend will start to decelerate. The trend in the ISM is not sustainable, hence, it will start to moderate with a potential dampening effect on GDP growth. It is all about the rate of change. I agree that the trend in the S&P 500 could continue, but as this trend starts to moderate, one should expect a more measured improvement in margins.
In all likelihood, margins should start to slow and eventually compress, which would require a different investment strategy than is presently being deployed. Empirical research shows margins are mean reverting, so with S&P 500 margins at their peak, a rational approach would be to reduce ones leverage and adjust your portfolio accordingly.
Way back when…… slowing manufacturing would be a negative at this stage of a recovery. Now it is BULLISH! Slowing manufacturing means more unemployment! Buy Buy Buy!
Who needs money managers when you have the Federal Reserve. Markets will never correct and returns will be manufactured forever!
please get this into your head. nothing the fed governors spout out about intersest rates possibly being raised matters one iota. it is all ben and dudley. whatever they say goes and rates will stay low as long as they say which now is FORVER. there will be no backing off of any qe2 in any way. second stocks trade on sentiment. that is it. get that into your quantitative models and harvard MBA brains. earnings do not matter. stocks trade on sentiment alone. there is no way this website can refute this. most of stock gains are on willingness to pay fopr higher and higher pe ratios. if you want to learn fraud street fuck your phd mba and learn psychology.