Fisher Investments Editorial Staff
Investor Sentiment

Stretched Sentiment

By, 02/21/2014
Ratings833.771084

Sentiment’s ongoing tug-of-war just kicked up a notch. Source: Chris Jackson/Getty Source.

Investors must feel pretty wobbly these days—seems like optimists and skeptics are constantly pulling folks back and forth. That was certainly the case this week, as investors digested some decidedly mixed global economic data. Some, like the US’s flash manufacturing PMI, had headlines cheering fundamental improvement (finally!). Yet other global metrics cast a darker shadow. As bull markets mature, it’s not especially surprising to see sentiment so mixed. The near-constant tug–of-war between skepticism and optimism tells us this global bull still has room to run.

Recent US data came in strong, helping optimism’s hold. February’s Markit Flash manufacturing PMI rose the most in nearly four years to 56.7 (readings over 50 signal growth), with forward-looking new orders rising to 58.8. Many suggested strong PMI data support future growth—even as recent bad weather whacked some regional manufacturing indexes. More optimism followed as most corporate revenues beat expectations and weekly jobless claims (a lagging indicator), foreclosures and mortgage delinquencies fell. And as growth continues, CPI remains muted, creating what folks called a Goldilocks scenario in the ‘90s—not too hot, not too cold, just right.

Investors are finally figuring out the US isn’t teetering, yet worries over other economies keep tugging sentiment back to skepticism. The eurozone’s flash February PMIs mostly grew, but many focused on slower rates of expansion and French contraction (composite read 47.6 and services 48.9). China’s HSBC flash manufacturing PMI (the unofficial measure focusing on smaller, private firms) fell further into contraction, from 49.5 in January to 48.3 in February. Japanese trade disappointed: Exports grew 9.5% in January, and imports 25%—but by volume, exports fell 0.2% m/m, while imports rose 8.0% m/m. The weak yen may have buoyed export values, but it didn’t help output—though it made rising imports (specifically energy) more expensive than ever, further burdening businesses and households. Japan’s Q4 GDP greatly missed expectations—growing 1.0% annualized versus 2.8%. Folks expect more softness after April’s sales tax hike. With so much seemingly bad news overseas, many still believe the global expansion isn’t sustainable.

Yet despite some superficially disappointing metrics, fundamentals point to more growth ahead. The US has been doing dandy, and the UK’s recovery is chugging along. Europe’s doing alright, too! It’s just recovering unevenly, with some countries growing faster than others, which points to a more muted overall growth rate. But that’s normal in a region as varied as the 18-country bloc—not all countries or sectors will grow in a straight line. What matters more is overall (if gradual) improvement—which recent PMIs (among other data) actually support. The eurozone’s composite PMI showed only slightly slower growth at 52.7 (from January’s 52.9). German PMIs were notably strong: 56.1 composite, 55.4 for services and 54.7 for manufacturing. Even France wasn’t uniformly negative— manufacturing output expanded (50.5)! And new orders sub-indexes grew in almost every eurozone survey.

Slower growth and occasional contraction in some sectors and countries doesn’t mean the world is weakening. Consider recent Chinese data: HSBC manufacturing PMI has been contracting, but overall, the country is still growing: GDP is still relatively high, and the Service sector is growing—and eclipsed manufacturing as the country’s largest sector last year. Within manufacturing, falling output at some firms needn’t signal fundamental weakness—as we wrote last month, it’s likely tied to the clampdown on unofficial lending (private firms’ primary credit supply) and government-driven cutbacks in certain industries. There is also the matter of the Lunar New Year—a week-long holiday that distorts January and February data every year and hit both months this year. Looking at all January and February data combined—manufacturing, industrial production, retail sales, trade, credit—will give investors a far better picture of Chinese growth than one reading of part of one sector in one skewed month.

Not that every country is in great shape—Japan likely remains a drag. The weak yen hasn’t yet provided a net benefit, growth is slowing significantly, and April’s sales tax hike likely weighs on consumer spending. In short, the cyclical factors boosting Japanese growth last year appear to be fading, and Prime Minister Shinzo Abe hasn’t passed any of the reforms necessary to address the country’s structural issues. Still, the odd slumping nation needn’t pull down an otherwise healthy globe. Remember, Japan has struggled a while without materially impacting growth elsewhere.

But folks still expect the world’s slower growing nations to pull down the stronger ones. This is bullish! Over time, markets move most on the gap between reality and expectations. While greens shoots of rational optimism exist, jitters abound—keeping expectations low and creating an environment where modest improvement can be a big surprise. That’s a powerful force to help stocks climb higher. 

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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