When the financial crisis was just starting to resolve, some economic data points began to look less bad and a few even looked good. Ben Bernanke called these “green shoots”, suggesting new growth. At the time, concern levels were high and stock prices were low.
Since 2009, there’s been stability and modest growth. Stock prices are higher. Much higher. I interpret high prices at least in part to mean investor expectations are high, anticipating more of the same… a stable economy with modest growth.
When I buy stocks, in general I like bargains. I’d rather be buying when the price is low. When prices are low, perhaps disappointment is priced in, and any positive surprises can drive meaningful upside. Conversely, when stock prices are high, perhaps positive news has smaller impact and disappointments can be more impactful. Thus arises two of Warren Buffet’s pithy quotes:
“Whether I’m buying stocks or socks, I like buying things when they’re marked down.”
“Be fearful when others are greedy and greedy when others are fearful.”
Taking these elements together (higher priced equities and generally positive expectations) I’m mindful of economic data points that may herald possible changes in the state of the economy. Here are two worth noting: The Institute for Supply Chain Management’s (ISM) Manufacturing Report on Business and the Chicago Business Survey.
The ISM Manufacturing Report monitors the health of the manufacturing sector. It has declined in recent months to the lowest level since 2009. See five and fifteen year graphs below:
The Chicago Business Survey (compiled by the ISM-Chicago) is a regional viewpoint that is considered a good barometer of the national economy. This too dropped to a six year low this month. See five and fifteen year graphs below:
This is not to suggest there is a slowdown in the economy, but rather there might be some slowing (these things only become clear in hindsight). Green shoots signaled emergence from the economic crisis. “Withered shoots” are at least worth acknowledging, especially when stock prices reflect positive expectations.