Weird night.
I was drafting an internal email, then suddenly what may be a more depressing, to subdued night turned… seriously positive.
I just go and try to sleep without even finding out why.
I think this is my mood nowadays. I am curious about trying to sleep better than why I am up maybe $10k suddenly.
Turns out maybe the mid caps and small caps run due to the ISM Manufacturing data jump unexpectedly above 50:
Why is this a big deal?
Because it has been below 50 since October 2022 which is about 3.3 years.
If you look at the chart below by Stenos Research, or from Real Vision’s Andreas Steno Larsen on Twitter, this is a long long span, in the past 20 years.
A few days ago, Andreas put this model of his out and you can see how well it tracks the ISM Manufacturing PMI. His model show that it should bounce and it really bounced!
Bond Dad provides the economic interpretation: ISM manufacturing for January breaks out to the expansionary upside, with a sidecar of stagflation
This suggests that inflationary pressures remain very present.
As I have noted in all of these monthly reports for the past year, for the economy as a whole the weighted index of manufacturing (25%) and non-manufacturing (75%) indexes is more important. In the non-manufacturing report, the averages of the last two months for the headline and new orders numbers have been 55.2 and 55.5, respectively.
If the services index, which will be reported on Wednesday, is in line with those numbers, it will suggest, as did the regional Fed manufacturing indexes for January, that this important sector is improving, and that the economy remains in an expansion, which may be improving as well. The caveat remains the important stagflationary pressures which have been showing up in almost all the recent data.
But we are not out of the woods yet.
Manufacturing is less of a component of the US, and perhaps the services data is more important. But manufacturing still applies to small caps and mid caps since industrial is 18% of S&P 600 and 25% of S&P 400.
End Game Macro highlights that employment is still contracting, new orders are pretty flat and inventories remain in contraction.
The ISM survey’s forward-looking new orders sub-index jumped to 57.1 last month, the highest level since February 2022, from 47.4 in December. A measure of backlog orders increased to the highest level since August 2022, while exports recovered a bit.
The surge in new orders, however, meant some stress on supply chains and higher input costs
Renaissance Macro posted the respondent commentary which was not as upbeat as RenMac would have guessed given the strong ISM Manufacturing PMI for January. Concerns about weak sales and another round of tariffs:
We shall see.
We still have the bonus 100% Depreciation as part of the One Big Beautiful Bill. This restores 100% bonus depreciation for qualifying assets placed in service after January 19, 2025. This legislation allows businesses to immediately deduct the full cost of eligible property—including machinery, equipment, and certain software—rather than depreciating it over several years, eliminating the previously planned phase-out.
There is a tax incentive if you increase your capex, and this might matter.
Why does this matter?
The chart below layers two US small cap ETF, the Russell 2000 IWM (blue), the S&P 600 Small Cap IJR (Red) and the S&P 400 Mid Cap (Cyan) with the ISM Manufacturing PMI in the bottom panel:
I use horizontal bars to divide the periods where ISM went above 50 and below 50 and you can see if it is above 50 whether it is better for these more non-information technology US indexes.
And the chart below shows the ISM PMI against Bitcoin.
Perhaps not clear yet, but it does ask the question: What if it is a rolling recession and the non-Information Technology is slowly emerging out of it?
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Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Fee-only Wealth Advisory Firm Providend. All opinions on Investment Moats are his own and does not represent the views of Providend.
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