The ISM manufacturing index came out about fifteen minutes ago and was a surprisingly strong 56.3 compared to expectations of 52.9. Generally speaking a read of under 50 indicates contraction rather than expansion in the manufacturing sector. Given the decline in the markets, this data is having a huge positive impact on stocks since the release at 10am. For those of us who have believed this slowdown represents a soft landing/soft patch rather than an impending double dip, this data is very, very, very encouraging.
Did I mention that it was very encouraging?
Generally speaking the ISM Index leads the real economy by three to six months. Not too surprisingly, the indicator began to weaken last spring from all time highs and the market has been soft ever since in spite of great fundamental earnings results from most companies. These weaker readings may have shown up in the tone of more cautious earnings commentaries in recent weeks like those of Cisco. Now that the index reading has actually turned up rather than declined further, the tone of the markets could change, perhaps dramatically, in the coming months. It could be expected that fundamental outlooks from companies would therefore once again become more positive by the end of this year. (Granted, in July the reading was 55, so the 56 reading isn’t a huge increase, but relative to some sub 50 expectations for August, it is definitely expectationally tradeable.)
Of course, no one should get carried away with any single indicator – the markets aren’t that simple or easy – but in our minds it supports a soft landing view and will likely affirm the trading range for the S&P 500 of 1040 on the low side and 1200 on the high side. With the market at the lower end of the band in recent days, I suspect we could see a very decent bounce.
This reading may also not bode well for the bond bubble and may potentially bring about the first few cracks in the idea that playing bonds may be safe here because the Fed will be perpetually on hold. If the ISM surveys remain surprisingly strong, then that assurance may be off the table and with it, the bubble in bonds closer to its end.
In conclusion, our conviction in the slower growth theme rather than double dip scenario went up considerably with this release and probably even more so for the markets as a whole. For now, this represents our best and most timely thinking on the matter, but as always, stay tuned!