Poor PMI Report Is Good News for Markets
Successful investing is all about a contrarian perspective. It is my personal challenge to stay contrary at all times. I am naturally that way, so it is somewhat easy for me. Still, there are times, like June or October 2007, when my contrary warning bells were going off, but I did not listen and I stayed long, much too long.
But just as too much positive talk should trigger a contrary response leading to the action of “Sell”, so too the same is true when there is too much negative sentiment, like right now. I actually allowed myself to be talked into this negativity in late July, much to my personal detriment. I went short the market in some of my accounts, and sold stock and funds in others, with the market at SP500 = 950. I was worried about all the things I should have ignored: approach of 1000 on the SP index, approach of traditional scary September-October time period, talk of a double dip recession, talk of healthcare and all that it would do to the economy, etc.
But now, I have my head back on straight and I am long the markets and am rejoicing in negative talk. For example, today the Chicago Purchasing Managers Index (PMI) report was released. It fell to 46.1 from 50.0 the previous month. It was expected to be at 52.0. Anything below 50 indicates negative purchasing sentiment.
At the same time, the ADP private payroll forecast was weaker than had been expected by market participants and so the stock markets sold off. On the surface, this is bad news and reinforces the “double dip” recession, or “w” stock market talk. It should be a very bearish signal, right?
No. Wrong. In the economy and markets, quite often, what’s down is up and what is up is down. It is a bit of “Alice In Wonderland”. The reason that bad PMI and unemployment data are good? It is that it gives the Fed and Treasury the cover to continue with aggressive monetary and interest rate policy to get the economy back on track. As soon as the economic data turns stronger than Fed forecast will be the day the markets turn down. The Fed and Treasury will start applying the brakes by raising interest rates and tightening money supply.
Stronger economic data means higher interest rates. Higher interest rates mean an eventually weaker equity environment for no other reason than alternate investments yielding interest rate returns begin to look more attractive and shift some demand away from stock equities.
The sweet spot in any market recovery is when the economy bottoms but before it heats up enough to force higher interest rates to counter inflation. We are right now at the point of optimal return and have been since March. I am staying long until the Fed starts raising rates, probably not till after the middle of 2010.
Here is a video clip on the ADP report:
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