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More Strength More Volatility

CAMS Weekly View from the Corner – Week ending 2/9/2018

February 12, 2018

Several weeks ago we shared the Institute of Supply Management (ISM) report for manufacturing industries for December of 2017.  The report reflected on-going growth at an accelerating rate.  ISM is a private entity at the epicenter of supply management on a global basis.  Their membership is broad in regards to the numerous industries their members represent.

The ISM has been surveying their members regularly and simultaneously has published their ISM Non-Manufacturing Report on Business.  This focuses on service industries – the largest component of our economy.  A key measure within this report is the Non-manufacturing Index (NMI) which is made up of various measures of activity.

A number above 50 for the NMI represents growth and below 50 represents contraction.  Moving further away from 50 in either direction represents enhanced strength or weakness.

This past week the NMI for Non-Manufacturing registered nearly 60 representing growth at an accelerating rate.  This is the highest reading we have seen since year 2005.  In addition, New Orders and Employment – which are components of the overall index – also posted notable strength that is accelerating.

The above table reflects the aforementioned results of the overall NMI as well as some key measures of specific activity.

Included here are the “Prices” component; notice they too are reported as increasing at a faster rate.  All told, the above data walks us to the heart of the stock market issues of late.

Very simply:  we have rock solid economic growth with inflation starting to chirp up as well.  With this, the bond market is taking note of the across-the-board strengthening economic backdrop and is selling off which results in higher interest rates.  These rates have picked up in their trend in recent weeks which is causing concern for stocks.

In light of the historically highly valued stock market said interest rate trend is causing a quick stock market pullback.  As offered here in previous Views; the stronger economy is also bringing with it the off-setting positive of stronger earnings for companies overall.  Realizing profits are the lifeblood of stock prices – especially expensive stock prices – the higher profits are a much needed support.

With this we are now firmly in the economic cycle where the economy is solid and profits are growing while stock valuations are historically high.  Adding concern to this backdrop is the uptick of inflation and rising interest rates.

As we offered in our previous Weekly View, when placed together this is a formula for stock market volatility which historically is a normal experience when owning stocks.  The seemingly higher high nearly every day, in particular in recent months, is a historical aberration not the norm.  Invest accordingly to your comfort level.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio


H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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