I’ve been seeing increasing signs of capitulation recently, mostly in the form of unashamed celebration of soaring markets and a few former ‘holdouts’ joining in on the action, or people not taking old warnings seriously (mocking them, even). Such capitulation is one sign of the end being near … both at the top of the market cycle and at the bottom (at the bottom the capitulation is in the opposite direction).
“You made me promises promises, knowing I'd believe; Promises promises, you knew you'd never keep.” so the song lyrics go, which seem to sum up present market sentiment toward traditional indicators of recession.
Everyone’s a genius in a rising market.
Unquestionably, the rollover of the economy and the subsequent market reaction is slow in coming (the slowest ever, it would seem). On top of that, since Covid-19, the economic environment has been convoluted and the data ‘noisy’.
An example of how unusual the economic environment has been is seen in the New York Fed’s Empire State General Business Conditions Diffusion Index (this is one of the regional PMI indices I use and reference from time to time).
Looking at the above chart, what was most noticeable was how volatile the index has been since 2022 compared to the prior 20 years.
I decided to measure the variance, to quantify how noisy the data has become. The average standard deviation in the monthly Empire State survey returns has jumped to sit consistently above the highs for the last 20 years (outside of the big swings caused by the GFC and Covid-19 recessions, that is).
This shows that owners of manufacturing businesses in New York have, for the last two years, been unable to tell, month to month, what is happening in their business.
This is why I aggregate multiple data series or look for confirming data elsewhere and look to the trends. It helps eliminate noise from a single data series that might be misleading.