Here is the latest on the most important forward-looking macro indicators that help us understand where the economy and markets are likely heading:
NFIB index : SMBs still staying relatively strong. The index is flat at Aug 91.30, July 91.90 and a year ago 91.80. Pre-pandemic norm was 103+. Sept report comes out this week.
10 year bond interest rate : Currently at 4.7%. Denoting that rates will stay higher for longer, having risen very strongly by over 25% since end-Q2 2023.
US $ DXY index : Put in a 2023 low on July 13th and has risen over 6.5% since then. The chart made a golden cross on Sept 8th denoting that it could keep climbing higher.
ISM manufacturing & new orders : Sept ISM manufacturing logged 49 versus 47.6 in Aug. This is the 3rd month of positive growth after 11 months of contraction (< 50). New manufacturing orders rose, factory production rose and employment rose and prices paid went lower.
ISM services & new orders : Sept ISM services clocked in at 53.6 versus 54.5 in Aug. New orders fell -10% versus Aug. Services prices paid remained unchanged. Business activity stayed strong, supplier deliveries were higher and employment ticked lower.
Take-aways
SMB strength is critical to the success of the US economy, labor markets and consumer sentiment. Any weakness could signal upcoming loss of jobs. However, that could also be conducive to a soft landing, by encouraging the US feds to cut interest rates.
The 10-year bond rate and US $ strength are putting downward pressure on market liquidity and business conditions. US $ strength is good for US consumers, but not so good for the rest of the world because it is then more expensive for countries to buy commodities, goods and services to fuel their internal economic growth.
ISM metrics are signaling a slight resurgence in the manufacturing sector and slight weakness or even a topping pattern in the services sector. When both of them mark a bottom and start trending higher consistently, they could be signalling better days ahead for the US economy. As an investor, I do not want to wait for them to get above 50 before I put money to work. I might want to catch that wave earlier…if I trust the trend higher.
Here’s why…
When the ISM is below 50 and rising, the SP 500 has returned about 17.6% average over the next 12 months.
Remember, we want to focus on forward-looking macro indicators and not get mired in lagging indicators like unemployment rates, jobless claims, inflation rates and GDP numbers. Those metrics are still important, but not as useful to investors who want to stay ahead of the curve.
Without question the strength of the US $ is good for the consumer and the economy. The US is a net importer of goods, whatever the impact on our exports is dwarfed by the lower cost of imports. Also, the rest of the world buys from the US is in large part essential stuff (tech,…) for which demand may very well be inelastic.
The ISM index is calculated by combining the results of a survey of manufacturing supply executives. The survey asks respondents to rate a variety of indicators on a scale of 0 to 100. A reading above 50 indicates manufacturing sector expansion and a reading below 50 indicates manufacturing sector contraction.
The survey is based on five components: New orders, Production, Employment, Supplier deliveries, Inventories.
The index is calculated by:
Taking the percentage of respondents that report that the activity has increased (“Better”) and adding it to one-half of the percentage that report the activity has not changed (“Same”)
Adjusting four of the five components for normal seasonal variations
Adding in inventories
Applying equal weights to each
Calculating a single monthly index number
These are the readings for the past 4 months, denoting expansion of manufacturing activity for the past 3 months:
Nope. All of those readings are below 50. As you wrote, “a reading below 50 indicates manufacturing sector contraction.” Thus, manufacturing was contracting during those months.
Please read up on the methodology. Over the past 3 months, a higher percentage of manufacturing executives responded with a reading of 50+, denoting growth in their individual facilities.
Similarly, a lower +ve CPI print is still higher inflation as compared to the previous period, only with prices rising slower than before.
As an investor, I am looking for a positive trend reversal in the ISMs. I prefer not to wait for the ISM index to give me an all-clear, 50+ reading before I put money to work.
More to the point, Tesla stock, Meta and Google stock are actionable now. Nvidia and Microsoft stock are just below early entries. Even Apple is testing a key level, with a possible early entry just above that. Only Amazon needs more extensive repair work.
With the stock market in a confirmed uptrend, can the Magnificent Seven end 2023 on a high note?
Nvidia stock and Meta are on IBD Leaderboard, with TSLA stock joining the Leaderboard on Tuesday. Meta stock is on SwingTrader. MSFT stock is on IBD Long-Term Leaders. Meta, Nvidia and Tesla stock are on the IBD 50.
Could this be a sign of the short term trend reversal? Time will tell…doc
