EC US Macro Markets: The ISM Schism

From my read of sentiment (and social media), there is a sense that something doesn't quite stack up...  Stock prices are headed higher, yet for the most part, the data still sucks. 

So what's up with the disconnect?  Is the market on borrowed time, or is it on the money?

With the following charts, I will help bring some clarity to the issue.  

And that's an important point: markets are complex.  I find half of the job in generating meaningful insight is simply to bring clarity where others bring complexity.

Sometimes that comes from a single chart, and often times it's the synthesis of the right combination of charts.  Today's combination of charts examine both the issue and illuminate the outlook by squaring up the disconnect.

On with the charts...

1. S&P500 vs the ISM Manufacturing PMI - a Slight Disconnect

The first chart shows how a slight disconnect has opened up in the rolling Year on Year percent change in the S&P500 vs the level of the ISM manufacturing PMI.  It's certainly not the first time a gap has opened up, and there's probably 2 main points I would highlight.  First, the fact that the ISM moves so closely with the S&P500 says a lot about the sentiment component within that indicator (which after all is a survey of humans, and humans are subject to swings in sentiment).  Second, though it's hard to make a definitive statement, there is a slight tendency for the S&P500 to lead the ISM.  So we could conclude by saying the stock market is just leading the ISM, but it's hardly a satisfying conclusion, especially if just based on the chart below.

(Click on image to enlarge)

What to watch for: the initial rebound in the manufacturing PMI adds weight to the idea that equities are just leading the ISM, so look for follow-through in Nov/Dec (or lack thereof!).  Also watch out if the disconnect widens to an extreme.

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