From a small northwestern observatory…

Fall isn’t usually the time we talk about rays of sunshine, particularly not here in Seattle where we all “hunker down” this time of year for the long, dark, wet winter.  Plus, I just came back from three weeks on the road (nine hotels, 4 time zones, two rental cars with a combined 2,000 miles, and four plane flights).  One of the first things to hit my in-box was the periodic Real Estate Investment SmartBrief from the National Association of Real Estate Investment Trusts with the headline “Hopes for U.S. Rebound Fade as Global Trade Slips”.  Sigh….. not a really nice headline, eh?

Now, I have the greatest respect for NAREIT, and out of fairness, they lifted this story from the Wall Street Journal.  Nonetheless, when the market opened this morning, it actually darted into positive territory, with the S&P hovering above 1450 as I write this.  (I hope I don’t jinx it!).  Of course, the stock market has risen for the past three Octobers, and in fact the market had a significant rally in September — a rarity for a month that’s usually fairly flat — with the S&P gaining almost 3% and the Dow picking up about 2% during the month.  The “rally” this morning was triggered by two things.  First, the ISM report (Institute for Supply Management) came out in positive territory for the first time in four months, confounding analysts who thought it was continuing downward.  Second, this caused the short-sellers, who have banking on a negative October, to re-think their positions.  Hence, the really great bounce this morning was, in no small part, a lot of short-covering.

No question about it — a shrinkage in global trade is an unsettling thing, for three big reasons.  First, it signals that the net importer regions (particularly Europe) are continuing in the doldrums.  Second, healthy economies which are heavily trade based (such as the U.S.) depend on trade to stimulate GDP growth.  Finally, China is the world’s biggest manufacturing floor right now, and depends on trade to provide full-employment — nothing frightens Chinese officials more than unhappy workers with no jobs.  Thus, from both an economic perspective as well as a geopolitical perspective, a shrinkage in trade — or even a shrinkage in the growth of trade — is a bad thing.

Notably, also, while manufacturing is only 20% of the U.S. economy, it is 40% of the profits of the S&P 500.  Pundits are already noting that the ISM report is just one data point, but it’s a very important one.  In the next few days, we’ll see if the good news from ISM is sustained by other sectors of the economy.