Economic Demand - Fundamental Analysis For Long-term Stock Market Investors

Fundamental Analysis Indicators and indexes help us to understand the drivers of markets (fundamental indicators). If the indicators are showing strength then we remain invested. If we see a weakening across the board of these fundamentals, only then should we think about selling.  

Fundamental Analysis: The Main 'DEMAND' Charts AND INDICATORS

Demand determines supply which creates corporate earnings and profits. Therefore, in the first instance we are looking for signs of a secular drop off in demand for our first indicator of a secular downturn. Our focus here is on the more sensitive sectors, indexes, and indicators of demand.

US Manufacturing PMI 

The US Manufacturing PMI is a very important metric to track. As see below the bear market in 2022 was predicted by the divergence and decline of the PMU about 6 to 9 months before the downturn… i.e. The stock market will start doing badly about 6 to 9 month lag after the economy (PMI) starts doing badly...
(but the 2nd chart below shows long term HODL is still valid)

Falling Demand (Imports) with Rising Unemployment

The 3 main pre-covid US (and global) market crashes were accompanied by the Imports line crossing below zero and the Unemployment line starting a steeper ascent from a low position on the "Change from a Year ago" measure...

Consumer Sentiment

The University of Michigan consumer sentiment survey is probably the most often quoted measures of consumer sentiment. Going back to the 1970s readings of around 70 or below have coincided with recessions as shown by the grey shaded areas in the chart below...

The other main demand based signal that triggers ahead of (or with) recession is the US Manufacturing PMI. This often 'leads' the Services PMI and the wider US economy. Each time its has headed south of 45 we have seen a recession. At time of writing it's hovering around 47. If this continues down and stays down then we could see our recession sooner rather than later, but if it springs back up from this level like it did in 1989 (as you can see below), then we could be another 6 months to a year ahead of the next recession...

The US Manufacturing PMI is a very important metric to track. As see below the bear market in 2022 was predicted by the divergence and decline of the PMU about 6 to 9 months before the downturn… i.e. The stock market will start doing badly about 6 to 9 month lag after the economy (PMI) starts doing badly...
(but the 2nd chart below shows long term HODL is still valid)

The 10 Year US Gov Bond yield is highly correlated with the US ISM Manufacturing PMI. highlighted in red and blue are the downturns…(black yield line below is ‘inverted’ to show the correlation…)

The really big downturns in the PMI in 2000 and 2008 went hand in hand with those big stock market crashes. The correlation also applies on the way back up… 

Purchasing Managers Indices - The Official Measure of Global Demand

Purchasing Managers Indices (PMI) are a measure of purchases made by businesses and is a leading measure of economic strength. A PMI above 50 signals expansion and when below 50 its signals contraction. The image below shows the European and US PMIs to the end of 2019. As you can see the Great Financial Crisis 2008 (GFC) would have been a good time to consider the tactical use of bond funds as ‘flights to safety’ to preserve capital. Or, even basic ‘shorting’ of the market by selling out into cash and waiting for the bottom that inevitably comes and turns up again. For example the US and Eurozone composite PMI’s below show strong levels of confidence returning halfway through 2009… a good time to get back into the markets.

PMI (Purchasing Manager) indexes show current economic demand. This turns down when the stock market is about to do the same. So, once again, we need to be concerned about the US with globally 'diversified' funds so heavily invested in them. US manufacturing leads the stock market. If it goes down then US equities tend to follow and global equity markets behind the US markets

• US Manufacturing PMI (Markit)

• US Manufacturing PMI (ISM)

• US Manufacturing PMI (Services)

Figures above 50 show firms reporting growth, while figures below 50 mark decline. The previous low of 38.1 was in November 2008. For good measure, I have added a link to the Oxford Economics homepage which offers a great summary for the outlook and includes forecasting: –

• PMI HOMEPAGE

• PMI COMMENTARY & ANALYSIS

• PMI PRESS RELEASES

• OXFORD ECONOMICS

For a measure of the increase/decrease on global manufacturing (which is a decent barometer of where our global funds are heading, MacroMicro have created the the World Manufacturing Cycle Index. (You might need to scroll through the "Indicators for Market Reversal for the Next 6 Months" section to see this chart.)

Purchasing Managers Indices - The Official Measure of Global Demand

Purchasing Managers Indices (PMI) are a measure of purchases made by businesses and is a leading measure of economic strength. A PMI above 50 signals expansion and when below 50 its signals contraction. The image below shows the European and US PMIs to the end of 2019. As you can see the Great Financial Crisis 2008 (GFC) would have been a good time to consider the tactical use of bond funds as ‘flights to safety’ to preserve capital. Or, even basic ‘shorting’ of the market by selling out into cash and waiting for the bottom that inevitably comes and turns up again. For example the US and Eurozone composite PMI’s below show strong levels of confidence returning halfway through 2009… a good time to get back into the markets.

PMI (Purchasing Manager) indexes show current economic demand. This turns down when the stock market is about to do the same. So, once again, we need to be concerned about the US with globally 'diversified' funds so heavily invested in them. US manufacturing leads the stock market. If it goes down then US equities tend to follow and global equity markets behind the US markets.

AN ECONOMIC CYCLE LEADING INDICATOR - DURABLE GOODS

The 'durable goods' sub-sector is the sub-sector that is the most sensitive to The economic cycle. We can see declines leading into the last three major recessions: -

• Durable Goods (US) (Fed Reserve chart)

The “PMI Research & Analysis” link shows headlines ordered by date so you can get an instant summary of market strength or weakness just from reading the headlines. The brilliant tradingeconomics.com links also show PMI graphs/info and also have forecast tabs to show forecasts using economic models.

TRADING ECONOMICS US Composite PMI

TRADING ECONOMICS EURO PMI

CHINA PMI

The 'spread' between 'New Orders' and 'Inventories' show below from the ISM graph indicates that the US is already in a recession as the current level for that graph has only ever been seen when the US was in a recession.

Capacity Utilization Portrays Demand and Predicts Recession

The chart below of Capacity Utilization and Unemployment reveals the Capacity Utilization measure as a surprisingly good indicator for lack of demand or weakness in the economy leading to a rise in unemployemt and then recession (... shown in the chart by the shaded grey bars)