September marked yet another month of declining global manufacturing activity (typically a leading indicator for global growth). While a Purchasing Manager Index (PMI) survey reading of 50 denotes expansion vs. contraction territory, historically markets haven’t waited for the event before discounting the future; in fact, the 50th percentile reading stands virtually at current levels. Half the time global manufacturing readings have been higher than present and half the time they have not. Of more interest, perhaps, are other periods that have seen crossovers from the above median to below median threshold. There aren’t many and they read like the menu for a “who’s who” of market events:
I have posted a visual below
While it’s probably a tad bit early to be overly bearish without further confirmation of economic slowdown, a lot of crazy things can happen during this ‘no man’s land’ zone of the economic cycle. In 2008, while global growth was slowing, supply/demand elasticity issues saw oil prices nearly double in a short period of time. Not to mention the fall of Bear Stearns in 2008 or Asian crisis in early 1998.
Overall, given the longevity of the cycle, downright strange behavior emanating from global markets, and the number of investors who have forgotten what a good butt-kick feels like, it sure does feel like an old-fashioned risk off is due.
Finally, I’d be remiss not to mention that the Federal Reserve continues to raise rates into this backdrop. Remember the last time we saw tightening financial conditions going into a slowing economy?
All data for this note was sourced from Bloomberg.
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