🤔 What's going on with the business cycle?
The business cycle is maybe the most important thing to watch to determine long-term asset trends.
It's highly correlated to the price of assets like stocks and bitcoin.
So, what's going on with the business cycle?
Let's take a look...
When I say "the business cycle", I mean specifically US Manufacturing PMI (Purchasing Managers Index).
Below you can see PMI vs S&P 500.
The S&P 500 has currently "gotten ahead of itself" relative to the business cycle.
But this has happened many times before, most recently in the mid 1990s (yellow).
And here's bitcoin.
What these charts show is that risk assets historically like PMI above 50.
And "riskier" risk assets particularly so.
So what's the latest?
The last print for the PMI (for January) saw it rise to its highest level in years.
This sparked optimism about a new sustained PMI "expansion".
However, it was unclear whether this was a "front-running" of potential tariffs.
Or whether it was actually the start of a real upturn.
Over the past two weeks, we have seen more new data for regional Fed Manufacturing Indexes.
And its a mixed bag - some have fallen, some have risen.
I've combined 5 of the 6 regional Fed Manufacturing Indexes into one composite index.
(For some reason, Chicago Fed is not available on TradingView)
This composite measure fell in February.
But it is crucially still above 0 (expansionary).
Theoretically, regional Fed Manufacturing Indexes should lead PMI.
(They are released coincident with the month they are measuring, while PMI is released the month after)
What is the most correlated thing?
Over the past several years ARKK has appeared to be a very good leading indicator for PMI.
With a lead time of between one and six months.
ARKK is Cathie Wood's tech ETF focusing on "disruptive innovation".
My best guess for this is that parts of the fund do actually have manufacturing elements.
But also that it is on the more speculative end of the US stock market, and you would expect investors to "move out along the risk curve" during a PMI expansion.
It has fallen over the past week amid a general "risk-off" sentiment, but is still signaling higher for PMI if the correlation holds.
More below...