ISM and the Market Decline: The View from the Floor
Yesterday we described the market reaction to the ISM report, showing that the result was quite consistent with the pattern of GDP growth below 2%. We noted that "…many traders still do not realize that the break point for an economic
decline is a reading below 42. There was a knee-jerk reaction since
the report was below the symbolic "50" and that fits the prevailing
gloomy recession forecasts."
Confirmation comes from Art Cashin’s daily commentary. (Sign up with UBS Financial Services to get Cashin’s Comments and other strong research reports.) As regular readers know we regard Art as the best source of information about what people are thinking on the NYSE floor. Art writes as follows:
The Market Found Nothing Nice In The ISM Report – Stocks opened mixed and then dawdled about until the 10:00 a.m. release of the ISM report. It was rather ugly. Within minutes of the release, the Dow was down over 100 points. The headline number was 47.7 vs. a consensus estimate of 51 or so. By falling below the “neutral” level of growth (50), the ISM data suggested the economy had stopped growing and was beginning to contract. Worse, the new orders component fell even more sharply than the headline number. New orders plunged to 45.7 from November’s 52.6. That suggests the future may look bleaker with fewer new orders to drive growth. If all that were not bad enough, the price component increased, hinting inflationary pressure in a contracting economy. The stock market saw that as a sign of stagflation.
All of these reports include a number of different components. When the employment component is down, people worry about employment. (It was slightly higher this month.) This time the reaction centered on the new orders component. We have never heard of a study showing the independent predictive power of this component. If one checks out the chart at Briefing.com it tracks the overall index quite closely — not a surprise since it is weighted at 30%.
With a name like "new orders" it is natural to infer extra predictive power.
Art Cashin’s message tells us that traders misinterpreted the headline number and then placed a lot of weight on subcomponents. People are throwing around "stagflation," a term from an era of double digit inflation and unemployment rates, very loosely.
That is the reality. We are in an environment where traders emphasize the negative. This will change of course, and probably without much warning.
Meanwhile, it’s been a tough week even if you’re picking good sectors. Here is our weekly update: