One of the themes we have been hearing of late is that stocks, 10% off of their all time highs, are fully reflecting a recession.
That statement turns out to be, um, a tad less than accurate, as was shown by the most recent ISM non-manufacturing Index. Headlines such as Services Data Blindsides Market reveal how little the market actually had priced in even a mild recession, much less a deeper and longer one.
The ISM’s non-manufacturing
index reflects almost 90% of the economy, according to Bloomberg. Consensus expectations of 53% were dashed, as the index plummeted to ~41.0%. to the lowest level since October 2001. If we exclude 9/11, this was the weakest reading since the data began in 1997.
In response, all 10 industry groups in the S&P 500 declined, and the Dow dropped 220 points.
Across the board, the data released was surprisingly weak:
Business Activity Index at 41.9% (consistent with a recession historically)
New Orders Index at 43.5% (fell 10 pts)
Employment Index at 43.9% (An 8 point fall, matching the lowest on record).
Prices Paid remained elevated at 70.7
This is particularly surprising, as we recently learned from the WSJ OpEd pages that The U.S. Economy Is Fine (Really). I haven’t figured out why those pages insist on denying reality, but its their option to live in an alternative universe (Iraq has WMDs, economy is great, etc.)
There are lots of things that investors believe which I find perplexing. The Superbowl indicator is one, but the oddest to me is the so-called Fed Model, also known as the IBES Valuation Model. It is not that the Fed model is so terribly wrong — it has been both right and wrong over the…Read More