3 Things Worth Thinking About (Vol. 7)

[‘3 Things Worth Thinking About’ is a weekly publication of ideas, usually contrarian to the consensus, to provoke thoughtful discussions and decision-making processes. As a portfolio manager and strategist, I am sharing things that I am considering with respect to current investment models and portfolio allocations. Please feel free to email or tweet me with your comments and ideas.] Surge In Sentiment Surveys
There is an interesting divergence going on between sentiment based surveys, specifically the ISM Manufacturing and Non-Manufacturing surveys, and actual underlying economic data. This week saw both surveys rise sharply to cyclically high levels despite weakness in actual new orders and consumer consumption.
It is also somewhat intriguing that two groups measuring the same data are getting vastly different results. While the Institute of Supply Management survey saw sharp increases in optimism, Markit’s surveys of the same manufacturing and services related data saw declines. This is one of those cases where only one can be right.
The chart below shows the composite index of the ISM surveys (simple average of manufacturing and services data).

There is a running pattern in the surveys which the initial decline mid-economic cycle reverses back up to cycle peaks. The next decline in sentiment is during the latter stage of the economic cycle prior to the onset of the ultimate recession. The recent surge in survey activity, ex-underlying strength in the actual data, suggests that sentiment is anticipating a recovery that may or may not occur.

This post was published at StreetTalkLive on 04 September 2014.