The ISM Manufacturing Index rose to 56.0 in August from 54.2, indicates that the manufacturing sector has continued to recover at a solid pace.  But the recovery in production is badly lagging the stronger turnaround in spending, with the result that inventories are now looking very lean.  The inventories index fell to a record low.

In my view, this points to further gains in production in the months ahead and probably upward pressure for goods inflation, an environment that is unusual at this stage of the cycle.

The improvement was driven by a further jump in the new orders index to a 16 year high of 67.6, from 61.5.  According to Capital Economics, the data is suggesting a rebound in manufacturing output of about a 50% annualized rate.  I must again write these rebounds are from very depressed levels but does indicate a “V” shaped recovery.

Some may write there is a V shaped recovery in the equity markets.  Maybe if one indexes as the indices are entirely dominated by 5 or 6 issues.  Data point after data point indicates the historical gap between small cap value and large cap growth, currently over 42% for 2020 alone.  Large cap growth is up over 24% and small cap value is down over 18% YTD.  Wow!

According to Miller Value Advisors, the “crowdedness” of the large cap growth trade is beyond record proportions, a gap that has grown exponentially in recent weeks.

There will be a change but the operative question is when?  Data point after data point suggests the environment is prone to a sharp and sudden reversal.  What will be the catalyst?  Inflationary fears amplified by the new Fed policy of permitting inflation to run above the 2% speed limit for a period of time?

The issue with this statement there is no boundaries.  How high and how long?  As noted many times every time the markets declined over the past 10 years was the result of greater than expected growth that questions monetary policy.

Indexing is now the market and many bulge bracket firms are waring about the unprecedented risk that is possibly at hand.

Just as aside, Bloomberg writes there are roughly 9,000 companies in various indexes that track the broad global stock market.  Of these 9,000 companies, 30 of them produced more than 70% of the gain over the past five years, another Black Swan event.  Ten stocks were responsible for more than 50% of the gains and three were over 25% of the gain.


Commenting about yesterday’s market activity, technology firms continued their relentless advance, oil is around a five-month high on a pickup in economic activity as China signaled a pronounced recovery in oil consumption, the dollar fell to a two-year low and bonds nominally advanced.

Last night the foreign markets were up.   London was up 1.51%, Paris up 2.19% and Frankfurt up 2.20%.  China was down 0.17%, Japan up 0.47%  and Hang Sang down 0.26%.

The Dow should open nominally higher on economic optimism and dovish fed. The ADP Private Sector Employment survey is released at 8:15. The consensus view is 1 million jobs were created in August.  This data may influence the outlook for Friday’s BLS data.

The 10-year is off 4/32 to yield 0.68%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.