It might be time for investors to temper their expectations for future equity returns. That’s what the ISM Manufacturing data could be forecasting given its recent correlation with the S&P 500. According to Jeffrey Kleintop of LPL (via Bloomberg) the pace of change in the ISM’s diffusion index has a very close correlation with the year over year change in the S&P. I went into the Fed database to run the numbers and the correlation is indeed tight:
This doesn’t spell impending doom, but it does mean the red hot returns of the last few years are likely set to slow. With the diffusion index at its 20 year highs there is a very small chance that we don’t begin to see mean reversion in the coming quarters. Of course, this doesn’t mean we won’t continue to see year over year gains and economic expansion, but it does mean the pace of gains in the S&P will become more muted as expectations of robust economic growth decline.
I am following this indicator as well. According to it equities may even have some upside to catch before the pace mean-reverts.
InvestorX
Good payrolls. Now for ism in an hour….
agreed, but remember ben b. and his big chopper
Improving economy, ZIRP & QE II and very high investor confidence….market chugs higher. What was shocking is yesterday we had a couple of Fed governors state interest rate might need to rise. Shocking…why not just keep real interest rates negative and let the party continue.
the above chart is interesting, but it leaves out a third variable, namely gdp. see http://1.bp.blogspot.com/-y_2jvfNsSZQ/TZXbvt7gViI/AAAAAAAAE1A/CH8HXOLXBy4/s1600/NAPM+vs+GDP.jpg which would seem to show that gdp will rise based on ism.
now, my bet is that if we have a rising gdp, we will have a rising s&p500
This isn’t predicting a decline in the S&P. It’s just predicting a slowing in the rate of the climb.
Notify me of follow-up comments via e-mail
© 2009 pragcap.com · Register for PC
It might be time for investors to temper their expectations for future equity returns. That’s what the ISM Manufacturing data could be forecasting given its recent correlation with the S&P 500. According to Jeffrey Kleintop of LPL (via Bloomberg) the pace of change in the ISM’s diffusion index has a very close correlation with the year over year change in the S&P. I went into the Fed database to run the numbers and the correlation is indeed tight:
This doesn’t spell impending doom, but it does mean the red hot returns of the last few years are likely set to slow. With the diffusion index at its 20 year highs there is a very small chance that we don’t begin to see mean reversion in the coming quarters. Of course, this doesn’t mean we won’t continue to see year over year gains and economic expansion, but it does mean the pace of gains in the S&P will become more muted as expectations of robust economic growth decline.
I am following this indicator as well. According to it equities may even have some upside to catch before the pace mean-reverts.
InvestorX
Good payrolls. Now for ism in an hour….
agreed, but remember ben b. and his big chopper
Improving economy, ZIRP & QE II and very high investor confidence….market chugs higher. What was shocking is yesterday we had a couple of Fed governors state interest rate might need to rise. Shocking…why not just keep real interest rates negative and let the party continue.
the above chart is interesting, but it leaves out a third variable, namely gdp. see http://1.bp.blogspot.com/-y_2jvfNsSZQ/TZXbvt7gViI/AAAAAAAAE1A/CH8HXOLXBy4/s1600/NAPM+vs+GDP.jpg which would seem to show that gdp will rise based on ism.
now, my bet is that if we have a rising gdp, we will have a rising s&p500
This isn’t predicting a decline in the S&P. It’s just predicting a slowing in the rate of the climb.
Notify me of follow-up comments via e-mail
© 2009 pragcap.com · Register for PC
It might be time for investors to temper their expectations for future equity returns. That’s what the ISM Manufacturing data could be forecasting given its recent correlation with the S&P 500. According to Jeffrey Kleintop of LPL (via Bloomberg) the pace of change in the ISM’s diffusion index has a very close correlation with the year over year change in the S&P. I went into the Fed database to run the numbers and the correlation is indeed tight:
This doesn’t spell impending doom, but it does mean the red hot returns of the last few years are likely set to slow. With the diffusion index at its 20 year highs there is a very small chance that we don’t begin to see mean reversion in the coming quarters. Of course, this doesn’t mean we won’t continue to see year over year gains and economic expansion, but it does mean the pace of gains in the S&P will become more muted as expectations of robust economic growth decline.
I am following this indicator as well. According to it equities may even have some upside to catch before the pace mean-reverts.
InvestorX
Good payrolls. Now for ism in an hour….
agreed, but remember ben b. and his big chopper
Improving economy, ZIRP & QE II and very high investor confidence….market chugs higher. What was shocking is yesterday we had a couple of Fed governors state interest rate might need to rise. Shocking…why not just keep real interest rates negative and let the party continue.
the above chart is interesting, but it leaves out a third variable, namely gdp. see http://1.bp.blogspot.com/-y_2jvfNsSZQ/TZXbvt7gViI/AAAAAAAAE1A/CH8HXOLXBy4/s1600/NAPM+vs+GDP.jpg which would seem to show that gdp will rise based on ism.
now, my bet is that if we have a rising gdp, we will have a rising s&p500
This isn’t predicting a decline in the S&P. It’s just predicting a slowing in the rate of the climb.
Notify me of follow-up comments via e-mail
© 2009 pragcap.com · Register for PC
It might be time for investors to temper their expectations for future equity returns. That’s what the ISM Manufacturing data could be forecasting given its recent correlation with the S&P 500. According to Jeffrey Kleintop of LPL (via Bloomberg) the pace of change in the ISM’s diffusion index has a very close correlation with the year over year change in the S&P. I went into the Fed database to run the numbers and the correlation is indeed tight:
This doesn’t spell impending doom, but it does mean the red hot returns of the last few years are likely set to slow. With the diffusion index at its 20 year highs there is a very small chance that we don’t begin to see mean reversion in the coming quarters. Of course, this doesn’t mean we won’t continue to see year over year gains and economic expansion, but it does mean the pace of gains in the S&P will become more muted as expectations of robust economic growth decline.
I am following this indicator as well. According to it equities may even have some upside to catch before the pace mean-reverts.
InvestorX
Good payrolls. Now for ism in an hour….
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