Equity investors were spooked by manufacturing data Tuesday that showed the sector at its weakest since the aftermath of the financial crisis, precipitating a nearly 350 point swing to the downside for the Dow Jones Industrial Average.
But Tony Dwyer, chief market strategist at Canaccord Genuity, told MarketWatch in an interview Tuesday that the Institute for Supply Management’s manufacturing survey simply told us “what we already know.”
“There’s a global manufacturing slowdown that’s pretty sharp based on the trade war,” he said. Meanwhile, other surveys on manufacturing issued by Markit showed the U.S. sector in expansion while reflecting improvement in China and Europe. “I know investors are scared because they reacted to the weaker data and completely ignored” the Markit figures, Dwyer said.
Even if one were to take the ISM data as the final word on the state of manufacturing, Dwyer argued, there are still many reasons for investors to take this opportunity to position themselves for a forthcoming rebound in economic and corporate profit growth.
Dwyer sees the current soft spot as a repeat of the “mini-recessions” in 2011-2012, triggered by the European debt crisis, and that of 2015-2016, instigated by a collapse in oil prices.
“Market pundits keep trying to identify the next recession while we are just beginning to emerge from the third mini recession of this cycle,” Dwyer said in a Tuesday note to clients. Low interest rates, he argued, “have already done the work of stimulating future growth, and Fed Chair Jerome Powell’s comment that the Fed will be more aggressive if data weakness continues to support an offensive position.”
Dwyer told MarketWatch that he believes the Fed will move to cut interest rates for the third time this year in October, following the weaker than expected ISM data. He also predicted that the global growth picture has begun bottom, pointing to the OECD composite leading index, which shows that growth is deteriorating less quickly today than in recent months, and a recent jump in the Citigroup Economic Surprise index, which shows global economic data has begun to surpass expectations.
“We believe the stage for the next leg higher toward our 2020 S&P 500 index SPX, -1.18% target of 3,350 is set, driven by less poor global economic data, ultimately leading to a reacceleration [of global growth], continued accommodative monetary policy and news and tweet fatigue,” he wrote. “Very few are betting on an improved growth outlook that data suggest is already happening.”
Though he believes that uncertainty surrounding U.S., British and Chinese politics will continue to drive volatility in the months ahead, “the question becomes what do you do about that.” Dwyer recommends investors overweight their portfolios in cyclical sectors, including industrials and financials.
The single most compelling reason for optimism, he said, was global central bank policy, which has become increasingly dovish in recent months.
“It comes down to a simple point, the global central banks are telling you what their game plan is and investors keep trying to figure out if it’s the right or wrong move,” he said. “It just is.”