Enis’s Macro Wrap – Large Divergence between U.S. Stocks and PMI

by Enis December 3, 2012 7:44 am • Commentary

Today is global PMI (purchasing managers’ index) day.  PMIs are usually a good coincident indicator of economic growth, and stocks are quite correlated to changes in the PMI over long periods of time.  Today’s charts provide one more reason in support of two of my market expectations for 2013:

  1. U.S. stocks are headed lower, and will be one of the underperforming markets globally in 2013
  2. European stocks will handily outperform U.S. stocks in 2013

Here is the chart of U.S. PMI (known as ISM manufacturing data in the U.S.) in red vs. the SPX index in orange over the last 4 years:



The positive correlation is evident.  The PMI data actually bottomed before the SPX index did, and its sharp rally pre-saged the massive run in the SPX from mid-2009 to mid-2011.  Since the spring of 2011 though, U.S. PMI data has been lagging, and the divergence has particularly widened since the June 2012 bottom in stocks.

The bullish argument has shifted.  Now I hear, “Well, manufacturing data is weak, but that’s purely a result of international weakness.  U.S. consumer and housing data is quite strong, indicating the resilience of the U.S. economy to global shocks.”  Perhaps, but that divergence in the chart is quite large, whatever your story.

Shifting to Europe, here is the chart of European PMI in red vs. the Euro Stoxx 50 index in orange over the last 4 years:



European stocks also moved higher in conjunction with improved PMI readings from 2009 to 2011. Since then, European PMIs and stocks are both well off their highs.

Earlier this year, the Euro Stoxx 50 index was underperforming the SPX index by almost 50%.  The two indices are now both up around 12.5% for 2012, and the 2 charts above provide some reasoning for that catch-up.  European stocks have already discounted a good amount of economic weakness, and their cheap valuations reflect a lot of bad news.  U.S. stocks, on the other hand, might be projecting an overly optimistic future for the coming year.

Markets overnight:

  • Asia opened green, but ended mostly red by the close, with China and Hong Kong down more than 1%.  Chinese PMI data came in very close to expectations.
  • Eurozone PMI also right in line with expectations, at 46.2.  Europe opened slightly higher, but is now up 1% in what feels like first-of-the-month buying
  • Spanish and Italian bond yields near the lows of the year as the Germans indicate willingness to write-off Greek debt to reduce debt burdens.
  • The dollar and Treasury bonds are both lower, while commodities are a touch higher.
  • U.S. ISM data comes out at 10 am EST.  Expectation is for a 51.5 reading.