Thursday, October 3, 2019

October 3, 2019 AM Market Comments - By Jason C. Hilliard

The big number out of the US today is the September ISM non-manufacturing index. The September ISM non-manufacturing index came in at 52.6 compared with the expected 55.3, which is down big from August's 56.4. This is a big deal, as the ISM manufacturing index was already pointing to a slowdown and has now metastasized into other areas of the US Economy. This is another big number confirming a major slowdown in the US. This is the poorest reading in over 3 years. The fact is that the manufacturing sector almost always points to a slowdown prior to the services sector. In fact, it's probably a good idea to heed that warning and not wait for the services sector to print a sub-50 number. For example, in April 2008 (prior to the collapse of Bear Stearns) the non-manufacturing ISM stood at 51.8, while the manufacturing ISM stood at 48.5 - higher than it is today, in fact. If you go back to June 2001 (4th month of recession), the non-manufacturing ISM stood at 50.1 and the manufacturing ISM stood at 43.2. Which number do you think first points to a weakening economy and a possible recession? Do you really want to wait for the non-manufacturing ISM to print below 50? I think not.

It may be worth noting that yesterday the New York ISM business conditions diffusion index collapsed in September to 42.8 from 50.3 in August, which is the second lowest print for this bull market. (Please note any print for ISM under 50 is considered contraction for these sectors of the economy)

From Tuesday's intra-month high, the Dow is down over 3.5% or 967 points and the S&P 500 is down 3.5% or 104 points. I'd say that's a quick slide in 2 trading days. These aggressive swings are taking a lot of investors by surprise, and at some point, will entice them to hit the sell button.

According to David Rosenberg, "from our analysis, the odds of the economy slipping into recession when the ISM falls below 48 is just over 60%. When this happens after the yield curve inverts, those odds rise to 70%. And guess what? When these two events occur at the same time the relative strength index of the Transports/Utilities plunges more than 30%, as has been the case, those recession odds climb to 90%."