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Moomoo Learn shared · Aug 1, 2023 02:17

[Insights for June] PMI pointed to an economic slowdown. How much longer can the stock market remain strong?

the July manufacturing PMI is about to be released soon. Have you fully understood the data for June? Follow Moomoo and analyze last month's data to see if it can inspire new ideas for you~Next, we will delve into analyzing last month's data from both a macro perspective and considering the market's reaction. Join us as we interpret overarching trends and uncover potential investment opportunities!
The first half of this year saw a perplexing combination of a struggling US economy and a surprisingly sturdy stock market.
The US Manufacturing PMI, which can provide valuable insights into the health of the manufacturing industry, registered at 46% in June 2023, down 0.9% from the reading of 46.9% in May. This is the eighth straight month of contraction in economic activity in the manufacturing industry.
By sharp contrast, the US stock market has been thriving. As of July 2023, the Nasdaq index, dominated by tech stocks, has surged more than 30%, which, from a technical point of view, suggests the US stock market is currently in bull territory.
[Insights for June] PMI pointed to an economic slowdown. How much longer can the stock market remain strong?
Will this divergence between the economy and the stock market continue? Given the signs of decline in the economy, does this suggest that the days of a booming stock market are numbered?
Perhaps it's time for us to think about a potential pullback.
[Insights for June] PMI pointed to an economic slowdown. How much longer can the stock market remain strong?
[Insights for June] PMI pointed to an economic slowdown. How much longer can the stock market remain strong?
The Purchasing Managers' Index (PMI) is usually the first key economic indicator released each month. This month's PMI figure hit a new low since the pandemic.
Before delving into the reasons behind this, let's review what we've learned about interpreting the reading.
1. Firstly, the PMI provides sequential data rather than annual data, so it should be compared with the previous period's release.
2. Secondly, when the PMI value is above 50%, it indicates the manufacturing industry is expanding, while a value below 50% indicates a contraction.
[Insights for June] PMI pointed to an economic slowdown. How much longer can the stock market remain strong?
The June Manufacturing PMI figure of 46% fell below the benchmark line of 50% in the manufacturing sector and the overall economic average of 48.7%, indicating a pessimistic economic outlook.
A closer look at its components may provide us with further insights into the business environment.
[Insights for June] PMI pointed to an economic slowdown. How much longer can the stock market remain strong?
When we analyze data, it is important to look for "abnormal changes".
The chart shows that all the items in June were below 50%, indicating that manufacturing workers are pessimistic about the economy.
Moreover, most of the data showed a downward trend, with over half of categories showing a faster decline rate.
Additionally, four indexes dropped from above 50%.
Notably, three sub-indexes - production, inventory, and employment - saw the most significant declines (we marked them in the chart).
Firstly, the production index decreased by 4.4% this month, indicating that companies are still cutting their output. Secondly, with fewer orders but faster supplier delivery speeds, coupled with companies trying to reduce inventory risks, inventories have decreased rapidly.
Additionally, after two months of expansion, employment has contracted, with some companies pausing recruitment and even starting to cut jobs.
From severial perspectives, the speed at which the US manufacturing industry is shrinking has accelerated compared to May, and optimism for the second half of 2023 also appears to be weakening.
However, there may be a silver lining - the Prices Paid Index, the raw material price indicator linked to inflation, has declined further, relieving some price pressure on factories and providing a glimmer of hope for the manufacturing industry.
[Insights for June] PMI pointed to an economic slowdown. How much longer can the stock market remain strong?
Opinions of manufacturing enterprises
● A computer and electronics company stated: The slowdown in the US economy has led to the modification/downgrading of business forecasts for the remaining time in 2023. Clients are not willing to purchase in advance.
● A chemical products company said: Customer orders have certainly slowed down. Our company originally thought that the second half of 2023 would be better than the first half, but it seems that it is not the case.
Conclusion
According to Timothy Fiore, chairman of the ISM Manufacturing Business Survey Committee, "Demand remains weak, production slows due to a lack of labor, and suppliers have idle capacity. Signs of further layoffs may appear soon."
[Insights for June] PMI pointed to an economic slowdown. How much longer can the stock market remain strong?
Market Reaction
[Insights for June] PMI pointed to an economic slowdown. How much longer can the stock market remain strong?
Since the PMI data fell short of the market expectation of 47.2, after the data was released, the market reacted negatively, with the US dollar index edging lower.
The US stock market was largely immune from the bad news of PMI data. It seems that most investors are still bullish on the US economy and believe it will not slide into a recession this year. Additionally, Mega-cap tech stocks that were battered by rising interest rates in 2022 have also seen a huge boost this year.
However, the risk of a recession is real. The PMI hitting a new low after the pandemic outbreak could be a signal that "the stock market does not have long-term sustainable growth."
Therefore, it's important for investors to look beyond current returns and be prepared for potential stock market declines should an economic downturn arrive. Investors can pay attention to upcoming FOMC meeting, as the Fed may restart the interest rate hike agenda.
[Insights for June] PMI pointed to an economic slowdown. How much longer can the stock market remain strong?
Wanna learn more?
If you find analyzing market trends from a macro perspective like this useful, we suggest checking out the fundamental analysis courses on Moomoo. These courses offer potentially valuable insights and knowledge that could help investors better understand economic indicators and ultimately make more informed investment decisions.
A Easy-to-understand Macro Course
[Insights for June] PMI pointed to an economic slowdown. How much longer can the stock market remain strong?
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only. Read more
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