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MMM- PMI's & Did you miss the boat?

Did you miss the boat?

It’s the beginning of 2004, just over a year after the trough in the stock market from the dotcom bubble. Canada’s stock market has increased roughly 39.74% and you are wondering, “have I missed the boat”?

Fast forward a few years to the end of the first quarter of 2010, roughly 1 year after the trough in the stock market due to the global financial crisis. Canada’s stock market has increased 57.51% and you are again left wondering, “have I missed the boat”?

It is now August 13, 2021 and it has been roughly 1.5 years since the trough in the stock market caused by the pandemic and the following recession. The Canadian stock Market has returned 73.41% over this period. Have you missed the boat? No, you have not.

If we look at the Canadian stock market from the beginning of Q4 2002 to today (August 13, 2021) and extrapolate the data, we can see that it has returned an astounding 244% which roughly translates to an annualized return of 7%.

There never has been and never will be “a boat”. The stock market isn’t some fad that you jump in and out of to make a quick buck (at least you shouldn’t be doing this…). The most successful investors have been those that view the stock market as a means to purchase real, cash flow generating businesses (and to sell when they are trading significantly above what they are worth). Not pieces of paper that will hopefully be worth more tomorrow. Once you learn to view the market from this perspective you start to realize that even though some companies have unjustifiably gone up in price, there are always companies that are unjustifiably at a low price. It is the job of our portfolio managers to find these quality undervalued businesses so that you can make returns that are acceptable within your financial plan.

If you are interested in learning more about how & why businesses are valued, you can take a look at the many articles (specifically my “Hypothetical company A – Intrinsic value” article) and videos I have put out that go further in depth in this. Let’s now take a look at what the data tells us regarding the current economy going forward!

What does the data say about the Economy?

If you want the short answer, the data I view tells me that we are in the early-mid section of the economic cycle. This is also consistent with what the economists I follow are seeing. This cycle seems to be moving fairly fast which could mean that we may see a much shorter timeframe until the next recession. This is something that we will want to watch closely.

The data!

For those of you interested in some data, you can see two main indicators below.

Below is the historical data from 1948 to today comparing the change in quarterly GDP (USA) to the purchasing manager’s index (USA). The “PMI” is important because it tells us what managers think of the economy. If you are expanding, then you likely are doing so because you expect consumers to spend and the economy to do well. If you are contracting your spending, the opposite is true. For this index, 50 is our midline. Over the long term, it is evident that the PMI has been a fairly good gauge of what will likely happen in the economy.

If we Zoom into the last economic cycle, we can see how the PMI dips below 50 before the recession hits. This along side other indicators makes it a good tool to help gauge where we are in the economic cycle.

As we can see, today it is in a good spot, however, it does look like it has peaked, and has done so rather quickly. If this is correct, we should see strong (above 50) numbers over the next few years, but that number will slowly decline instead of rising like it did in the early section of this economic cycle.

This is one reason why many economists have come to the conclusion that we are no longer in the “early” section of this economic cycle but rather in the “early-mid” section. The main takeaway from this is the speed at which this cycle seems to be advancing. This data is significant to portfolio management as it may indicate that we need to make our portfolios more conservative much more quickly than was the case in the last economic cycle.

If you have any questions or concerns, please be sure to reach out to me!


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