The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails

Numerical Nuances

Simple is almost always best, but understanding nuance is not far behind. The key to interpreting ISM—and some would say this is true of all economic data—is focusing on rates of change from one month to the next. This provides another early warning signal. Say PMI was at 58, and then it dropped to 54 and then 53, or that it rose from one month to the next by three points and then four points and then it stalled. All of those data points indicate some degree of economic expansion because PMI is above 50. But that is not the real message. If PMI was increasing at a rate of 4 percent month-to-month, and suddenly dropped to 2 percent—even though the absolute number was above 50—it is a sign that the economic expansion is stalling and could be preparing to contract. Portfolio managers would respond by thinking about readjusting portfolio allocations, because some stocks do better at different stages of the economic cycle.