The POWER of ISM:PMI
The economic cycle has been something every wealth manager in the world is trying to figure out. The running joke in the industry is that if someone knew what was going to happen next, they would have all the money. I spent a year after graduation working in the wealth management industry getting a first-hand look at buying, selling, gaining and unfortunately losing in the stock market. While I am not here to write you a blog about how to become a millionaire in the stock market, instead I would like to bring something very simple to your attention.
Any wealth manager that wants to have any chance of sleeping at night lives by a set of rules. With it being so difficult to predict the outcome of the economy you have to obey by a set of rules. These rules are your reasoning for why, when and how you buy and sell. They essentially cover you on a lot of bases. However one of the main one being your explanation to your customers for why you’re doing what you’re doing. These rules that you create were either rules you learned from a mentor or simply ones you created because you failed so many times. Either way they are your tools for staying ahead of the economic game. Many of these rules fall into indicators that people follow and once somethings happens they follow their rules and react.
The dynamic yield curve is probably the most well know indicator when it comes to a recession approaching and for good reason. It is a simple chart to read, simple chart to access and is extremely accurate.
A good economy is presented in the diagram when the curve is upward sloping. That means the short term interest rates are lower than long term interest rates. However in an economy expecting a recession the curve inverts or becomes flat. The short term interest rates exceed or become 0 in relation to long term interest rates
WHAT IS ISM:PMI
PMI stands for Purchasing Manufacturing Index and is a composite index that gives equal weighting to new orders, production, employment, supplier deliveries, and inventories. Each factor is seasonally adjusted. When you break down all the aspects of what goes into PMI, it would make sense why this is a powerful indicator. When there are high new orders, high level of production, high employment, high supplier deliveries you can expect that the economy is doing well. As you can expect when these indexes are low the economy is most likely struggling and declining. The final number after calculating these composite index can range anywhere from 35 to 65 realistically. There is an entire formula that shows you exactly how to calculate this number but my mentor gave me some words of wisdom when I asked about the formula.
Neal: “Do you know how a telephone works?”
Samir: “Yes I do”
Neal: “ Do you know how all the satellites come together to make your phone work?”,
Samir: “of course not, do you”
Neal : “Not a chance, yet I still use my phone every day, why because it accomplishes what I need.”
Sometimes you don’t need to know why things work or how they work, as long as you know it can help get what you need done.
History repeats itself in all aspects of life and the stock market is one of them. If you take data back 40 years and look at the PMI, every time it dropped below 50 for consecutive months we were followed up with a recession.
This PMI indicator paired up with the dynamic yield curve can boast your confidence in your next move in the stock market and potentially save you a lot of money. We receive the new number at the beginning of every month for the pervious month. May came in at 52.1 which was a .7 decline from the month of April and the lowest number we have seen in the last 12 months. Since January of this year we have seen a steady decline in the PMI.
The question will be were are we headed. If the economy continues to go in this direction how will the rest of the world react. Everyone around the world is waiting to see what will happen in the United States. If we can’t establish stability in the next few months international business will change dramatically just as it has in pervious recessions.
Today’s date is June 5th 2019 and yesterday was one of the best days in the stock market in a long time. Is this the turning point in the right direction or are our indicators suggesting we should prepare for another recession. With all this being said, it’s still too early to predict anything but hopefully you added something new to your list, it might just be the one thing that saves you a lot of money!