ISM manufacturing
29-Nov-2023. ISM Manufacturing. Forecast for November 2023. The ISM Manufacturing PMI is highly correlated with the regional PMI indices (New York, Philadelphia, Dallas, Richmon, Chicago), which we used to get earlier in the month before the release of ISM Manufacturing itself. We already know the first 4 regional PMIs for November, the Chicago PMI will be announced tomorrow (consensus 45, up from 44 in October), and on Friday the ISM Manufacturing (consensus is 49, up from 46.7 in October). My very simple model shows the ISM rebounding to 47.5 (Figure 1). The average of the regional PMIs is currently up +0.097 of standard deviation (I calculate the average based on the 4 already known readings + consensus in the case of the Chicago PMI). Figure 2 shows the longer history of ISM Manufacturing and the Average Z-score of the 5 Regional PMIs (0.91 correlation with ISM Manufacturing). Figure 3 shows the contributions of each regional PMI to the Average.
Chicago PMI Nov-2023
30-Nov-2023. Chicago PMI. Just printed 55.8! Wall Street expected only 46 (was 44 in October, so for Chicago PMI, this is an increase of 1.44 standard deviations). This raises my forecast for ISM Manufacturing to 48.3 (from 47.5) – see the chart. It should be remembered that PMI indices are indexes of the width of change, not the size of change (in other words, it is enough that in "most entities" it increased by 0.01% and we will get a high reading). Some comments suggest that the Chicago PMI’s beat is due to the return of workers to factories after the recent strikes.
30-Nov-2023. Chicago PMI. Just printed 55.8! Part 2. You can see how much the Chicago PMI soared in the attached chart. The difference between ISM Manufacturing (October) and Chicago PMI (November) is just 1.29 standard deviations. However, such divergences have historically occurred, but very rarely (since 1990, in the same month, only three times has the Chicago PMI been more than 1.3 standard deviations higher than the ISM Manufacturing).
FedEx & UPS
21-Dec-2023. FedEx -12%. Are we closer to the next S&P500 peak? FedEx and UPS are bellwethers for world trade/economic growth. So their stock prices could have some leading properties… Before the S&P500 peak in February 2020, both companies, but especially FedEx, underperformed the S&P500 (see Figure 1). Before the S&P500 peak in January 2022, FedEx underperformed the S&P500. And today both are underperforming S&P500. UPS from April 24, 2023 (the publication of Q1 2023 earnings). And now FedEx has joined in, falling 12% yesterday after reporting earnings for the quarter ending November 30, 2023 … Well, are we closer to another peak on the S&P500?
LEI vs Russell 2000
27-Nov-2023. Leading Economic Index vs Russell 2000. A quick comparison of the Leading Economic Index not only to the S&P500 but also to the Russell 2000. Figure 1 shows the annual change in the Russell 2000 and S&P500 based on the prices on the last trading day of the month. Figure 2 shows the annual change based on the average monthly prices (Figure 2 also shows the indexes themselves since 2006 - see bottom panel). Both stock indices have behaved similarly over the years, but it is clear that in recent months "gravity" has not spared small companies and the Russell 2000 is “lower and closer" to the LEI. This is even more visible when we take a closer look at the S&P500 and Russell 2000 (Figure 3), and especially the relative strength between them. Between February 2022 and March 2023, relative strength was roughly flat (both indexes moved similarly). However, since March 2023, the Russell 2000 index has definitely underperformed the S&P500 (which has also coincided with the lack of LEI recovery, which annual change since April 2023 has been flat at the level of -8% to -7% (no rebound here)). The outperformance of the S&P500 is mainly due to Mag7 (the generative AI, among others). However, it seems that the Russell 2000 and LEI are more indicative of the condition of the local economy.
LEI vs S&P500
24-Nov-2023. Leading Economic Index vs S&P500. Part 1. This week we got the reading of the US Conference Board Leading Economic Index (LEI) for October 2023. The annual change in this index in October 2023 was -7.64%. The year-on-year change of the S&P500 index in October 2023 is +8.3%. The chart shows the comparison of the S&P500 with the LEI. What may be worrying now is the lack of LEI rebound from current levels. Typically the stock market is faster and current S&P500 levels suggest a stronger economy and higher LEI levels. This relationship between S&P500 and LEI is especially useful after big LEI moves, and the LEI drop from April 2021 (+11.67% YoY) to April 2023 (-8.13% YoY) is a big deal. So, which index is wrong? Can’t both be right.
25-Nov-2023. Leading Economic Index vs. S&P500. Part 2. Calculating the annual change in the S&P500 based only on the index level on the last day of a given month could be a bit arbitrary. Therefore, I also calculated the yearly S&P500 change based on the average level of the index in a given month. Comparison in Figure 1. Generally, there are no major differences and the conclusions will be the same, but to be precise, the maximum positive difference was 15 percentage points (Feb-2010) and the maximum negative difference was 12.9 pp (Feb-2020, as a reminder S&P500 from 19-Feb-2020 (top of the cycle) to 28-Feb-2020 dropped 12.8% - this obviously affected the calculations for that month). Moving to monthly averages, we obtained a more smooth S&P500 YoY. The difference to the annual LEI change in October 2023 is even greater... - see chart 2. Now the S&P500 YoY (for average monthly levels) is +14.6% (in the version based on prices from the last day of the month it was +8.3% (the difference is due to the decline in the S&P500 at the end of Oct-2023 (vs. the monthly average) and an increase of S&P500 at the end of Oct-2022 vs. monthly average). Of course, the conclusions are the same... that the S&P500 either: (i) front-run the upcoming recovery in the US economy (which is not yet visible in the LEI) – or (ii) is simply wrong (and there will be no recovery in the LEI in the near future) – or (iii) S&P500 increased for other reasons which, by definition, cannot affect the LEI level. Bonus Chart. Yesterday we got the November 2023 flash reading of the S&P Global US Manufacturing PMI, which dropped to 49.4 (from 50.3 in October). Chart 3 shows the changes in the two main US PMIs and the annual change in the LEI. All three leading indicators confirm an upcoming slowdown in the US economy. Or all three indicators are wrong at the moment, and it’s just the S&P500 that correctly indicates the upcoming recovery in the US economy…
LEI Sep-2023
20-Oct-2023. US Leading Economic Index. We’ve just got the reading for September and the Leading Economic Index (LEI) fell 0.7%, after falling 0.5% in August. This decline represents an annual change of -7.84%. These are of course (historically) recessionary levels. However the LEI annual change has not deteriorated for 7 months... which can be interpreted in favor of stronger economy narrative and an adequate H4L (higher for longer) environment. Another argument in favor of H4L is the long Fed pause expected by the market. Similarly, ISM Manufacturing, which has been increasing since March, also supports H4L (for now). See chart 1 and the "H4L" writing. It was similar in 2006-2008. Both the FED’s pause (15 months), the LEI not falling more (about 10-12 months), and the slightly rising and not falling ISM Manufacturing (about 12 months) - then similarly indicated H4L. Chart 2. It took then a long time ... and did not end well.
