The “New” New Normal?

Are we in or entering a “New” New Normal? It is still a developing story, but the persistent short rotations into and out of high and low volatility periods, more stable economic growth with less severe peaks and troughs, trending lower unemployment with surprisingly low income growth, and growing corporate earnings all point to a new paradigm that capital markets are embracing. The latest indicators show a continuation of these trends.

The first business day of every month is a big day for capital markets because that is when the ISM PMI (Institute for Supply Management Purchasing Managers Index) report is released. This May 1 report for April continued a trend that started 10 years ago; for the 120th straight month the ISM PMI index indicated a GROWING economy! The index reading showed a value of 52.8 for April (readings over 50 indicate a growing manufacturing sector).

This is one of the most important economic indicators that I follow. Combining this with other indicators like leading economic indicators (LEI), industrial production, job and income growth, yield curve, technicals, asset correlations, etc. can give a good measure of how we are doing and if things are getting unhinged.

Year-to-date through May 3, market strength seems well-deserved. As I reported back on December 31, 2018, “On balance, there are warning signs, but no reason yet to run for the hills. The recent stock sell-off [during Q4 2018] has priced equities attractively and corporate bond spreads are reacting favorably with spreads lower than recent historic (indicating less concern about default risk).”

History tends to repeat itself, so let’s not get ahead of ourselves. But, for now, let’s enjoy the ride!