These times are difficult, no question. None of us have seen this kind of thing before. Without a previous experience, how then should we react? There is no playbook for this. We all need to do as best we can and help those around us with compassion. Rely on previous experiences. If you are fearful, be brave. Lean on those around you.
We are here as always. As you all know, we study day and night on your behalf.
Our Thoughts on the Markets: Drilling Down on the Data
Some of the typical signs of recession are here, but not all. Having said that, we are likely witnessing the end to the longest period of U.S. economic expansion in history.
Sign of Recession
Inverted Yield Curve
ISM Manufacturing PMI Below 45
Positive Inflationary Trends
Capacity Utilization above 80% and peaking
Housing Starts Declining
Labour Market Weakening
Leading Economic Indicators Negative
Source: Manulife Investment Management
ISM Purchasing Managers Index (PMI)
Let’s focus on this one data point today. You may have heard us refer to this number before.
The PMI is based on five major survey areas: new orders, inventory levels, production, supplier deliveries, and employment. The ISM weighs each of these survey areas equally. Effectively, the survey asks Manufacturing Purchase Managers if they are placing orders for inventory, meaning they have orders from clients that they need to fulfil. Think Ford and GM. To build a car you need parts. The phones are quiet at the moment. Orders and transportation are at a virtual standstill.
The magic number for PMI is 50. If PMI is above 50, it is a good indicator for the economy. Below 50 is not good. A number of 45 or lower usually coincides with a recession.
The current PMI numbers are not pretty, as seen below. This is not a good picture. Every current data point suggests that we are all way below the magic number of 50. There will be sectors that will have longer recovery horizons e.g. consumer discretionary (cruise lines, movie theatres, entertainment parks, and on, and on).
Global Manufacturing Heat Map – 2 Year Snapshot
Source: Manulife Asset Management, Bloomberg as of April 30, 2020
Once the PMI declines below 45 (April was 35) life as we know it will take a while to rebound. Of course we’d always prefer to deliver good news to you. At this juncture, we cannot. What we can stress is that while the signs are not apocalyptic they are, at least for the short term point to ‘not great’ economically speaking. The positive part of this is the equity markets are a leading indicator of the economy, and will rebound in a recovery long before the general economy.
So, are the equity markets paying attention to the data and is this the rebound? Since the low of March 23rd there has been a rebound in equity prices. We fully believe that this is a spike driven on optimism and hope (hope is not a strategy). Neither is it a meaningful measure. For this reason, we feel that there is likely to be a reckoning as the reality of the economic data collides with the optimism. We don’t recommend taking much comfort in these markets for now. Instead, we continue to rebalance with deliberation and dollar cost average with any cash into the markets.
Ending on good news: we may be through part I - the lockdown of the pandemic. Moving forward, social distancing measures, travel restrictions and a better resourced health care network should reduce the probability of a full-blown global reemergence of COVID-19. The recovery will be gradual as we reemerge slowly and adapt to the new normal. We look forward to celebrating new treatments and preventions to this virus from the very bright scientists currently working 24/7 and a return to a new normal life.
This publication contains opinions of the writer and may not reflect opinions of Manulife
Securities Incorporated and/or Manulife Securities Insurance Inc. The information contained herein was obtained from sources believed to be reliable, but no representation, or warranty, express or implied, is made by the writer or Manulife Securities Incorporated and/or Manulife Securities Insurance Inc. or
any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any of the securities. The securities discussed in this publication may not be eligible for sale in some jurisdictions. If you are not a Canadian resident, this report should not have been delivered to you. This publication is not meant to provide legal or account advice. As each situation is different you should consult your own professional Advisors for advice based on your specific circumstances.