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PMI Ruling Sentiment

 

“Davidson” submits:

The PMI from the Institute of Supply Management seems to rule the roost of investor psychology. The media and investors hold the PMI in high regard along with the LEI (Leading Economic Index) from The Conference Board. The PMI from 1977 and the LEI from 2000 reveals that each has called for recessions that did not occur like the present. The PMI has a prominent role in the LEI as do other sentiment indicators. Both, by my observations, have a history of calling for recession when the SP500, itself a market psychology measure, shifts to track the hard-count economic data despite the pessimism. For those who track the instances of miscalls, the PMI has forecasted 27 of the last 9 recessions. When you call “the sky is falling” that many times and it does not occur, one would think there is something amiss with what it was that triggered the pessimism. Nevertheless, both the PMI and the LEI remain in high regard and a media favorite.

In markets it is always “what is” vs “what people believe it may be” that determines the current price of anything. Often there is a mismatch between the two. Like a stopped clock telling the time correctly twice each day, market prices swing from under- to over- valuation vs true valuations (if investors could actually agree on such a thing as true valuation) multiple times every investment cycle. On average those companies that have financial growth rise in price over time which makes fundamental financial and economic analysis the best long-term approach But, being open to criticism not performing better than the indices quarter-to-quarter forces many institutional portfolio managers to fall into reliance on sentiment indicators i.e., buying when their investment committees feel optimistic/selling when not, like the PMI and LEI to stay employed. When they speak to the media their comments follow the PMI/LEI patterns.

Net/net, individual investors are much better buying the sentiment dips when the economic trends are rising. Like today!