Yielding to Reason

Is softening Purchasing Manager’s Index (PMI) data signaling the end of the economic party after a decade-long expansion? Or, do the numbers represent a temporary lull that will give way to continued growth?

While the debate is far from settled, at least one indicator suggests recent manufacturing weakness may simply reflect a pause as opposed to a full-fledged slowdown.

As the chart below illustrates, movements in the yield of the 10-year treasury have been tightly correlated with domestic manufacturing activity.

With yields stabilizing, the market appears to be signaling brighter times ahead for manufacturers if historic PMI patterns persist. A rebound could be particularly rewarding for attractively valued businesses in cyclical industrial areas of the market that already experienced a pullback when macro clouds gathered during the summer.

As value-oriented investors who have found significant opportunities among manufacturing and industrial companies, we would welcome such a development.

Stabilizing Bond Yields Foreshadow Better Industrial Activity?

Source: FactSet Research Systems Inc. and Heartland Advisors, Inc.
ISM Manufacturing PMI 10/31/1989 to 9/30/2019; 10-Year Treasury 10/31/1989 to 9/30/2020
Economic predictions are based on estimates and are subject to change.
ISM Manufacturing PMI (Purchasing Managers Index) is an index based on surveys of more than 400
manufacturing firms by the Institute for Supply Management (ISM). The PMI index is an indicator of the economic
health of the manufacturing sector based on five major indicators: new orders, inventory levels, production,
supplier deliveries and the employment environment. A reading over 50 represents that the industry is expanding,
under 50 represents a contraction, while a reading at 50 represents no change.

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Author

Troy McGlone

McGlone, CFA, is Vice President and Portfolio Manager of the Select Value Fund and its corresponding separately managed account strategy. He has 11 years of industry experience, 5 at Heartland.

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