It’s not out of the ordinary hear or read commentary about the stock market and how it is out of touch with what is actually occurring in the economy. This point isn’t that outlandish. Day to day market activity can be very disjointed and not a good representation of e actual changes in the economy.
Though the short term can be manic, the market can only run from ‘reality’ for so long. Eventually what is actually occurring in the economy will be reflected in the prices of securities. The process does work, but it is certainly not like clockwork. Behind all trades, computer generated or not, is a human finger or programming at work. Remember that.
To gain a sense of the markets ‘rationality’, I’m including an exhibit below of a +10 year chart of the ISM’s Purchasing Managers Index (Manufacturing) compared to the S&P 500. The chart is measuring month to month changes in each index. As you can see, deviations do occur between the two. Though the S&P 500 may buck the trend of the PMI, it cannot continually snub its nose at economic realities (as reflected in manufacturing contraction or growth).
What’s the PMI? An indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. It is reported at the beginning of each month. Investors widely regard the ISM PMI Index as a general barometer of economic health. Readings of less than 50 indicate contraction, while greater than 50 indicate expansion.