Taps Coogan – July 6th, 2023

I certainly wouldn’t hang my hat on it but, as the following chart from Isabelnet highlights, the S&P 500 is a moderately useful leading indicator of economic activity and it’s signaling recovery.

🇺🇸 ISM Manufacturing Index Decreased to 46% in June

Chart showing the correlation between the ISM Manufacturing Index and the S&P 500 Index
👉 https://t.co/i1lu3JmJ1q#ISM #manufacturing #PMI #mfg #markets #equities$spx #stockmarket #investing #spx $spy #sp500 #stocks pic.twitter.com/GD2UBXDcj9

— ISABELNET (@ISABELNET_SA) July 5, 2023

The ISM manufacturing index is already in recessionary territory and has been for a while. As we’ve noted before, while several leading recession indicators suggest a recession is still coming, others – like the ISM manufacturing, suggest it’s already happened. Within that context, the strength in the S&P 500 this year could be an indication that recovery, not worsening, is the next step.

Of note, a similar divergence occurred right before Covid in 2019 and early 2020. It’s hard to draw any useful conclusions given the uniqueness of that period, but it was a head fake.

For what it’s worth, the ‘recession or no recession’ debate is probably too binary to be useful. As we iron out the excesses of the Covid era and the decade of excessively accommodative monetary policy that proceeded it, there will be a lot of false dawns and false alarms. We have likened it to a purgatory and we expect to be here for a long time. The good news is that it’s been investable for now and, for those who prefer not to try, even cash now has solid returns. The bad news is that the risks skew to the downside, potentially severely.