Pro Perspectives 10/1/19

October 1, 2019

Yesterday we talked about the overwhelming weight of positive surprises in the economic data over the past month.  Today, we had a big negative surprise in manufacturing data (the September ISM Manufacturing index).

Here's a look at the chart …

As you can see, above the 50 level represents expansion in the manufacturing sector.  Below 50 represents contraction.  The September number was 47.8, the lowest number in ten years (since the global financial crisis). 

Now, if we look back at the dips in 2012 and 2016, they both have commonalities with the present:  Central banks responded.  

In 2012, the ECB pulled out the threat that they will do 'whatever it takes'.  The Fed followed by launching its third round of QE (QE3).  Later in the year, the ISM number bottomed and turned around.  

In 2016, following the crash in oil prices, and a contraction in global manufacturing activity, global central banks all responded with action.  The BOJ intervened in the currency markets (and likely used the dollars it bought to buy oil, putting a floor under it).  China eased reserve ratio requirements.  The Fed took four projected rate hikes for the year off of the table.  And the ECB ramped up its QE.  

What about this time?  Central banks are responding.  The Fed is cutting rates, and has stopped QT (quantitative tightening).  China is firing every bullet they have.  Global central banks around the world are cutting rates.  And the ECB is restarting QE.  

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Bottom line:  The central banks are acting! That should support global economic activity, and therefore put a floor under global manufacturing activity.   

So, within the context of a strong consumer, and ultra-accomodative central banks, positioned to keep the consumer strong and to neutralize the indefinite trade war, this manufacturing data point should not be taken as some Draconian signal that recession is here.  

With that in mind, after stocks took a hit today on the weak manufacturing number — as did global interest rates and almost all commodities — where do things go from here?  

We revisited the big 2940 level in the S&P 500 today. 


We talked about this big level back in August.  Here's a look at an excerpt from the Aug 29 note …

… we're approaching a big technical level in stocks. 

If we get above this key 2,940 area in stocks (the yellow line in the chart above), we could see record highs again, soon.
Here's how the chart looks today …

As you can see, that level was indeed an inflection point for stocks.  Now we are revisiting it, which should make for a good spot to buy, not sell.