One week ago today, S&P Global’s U.S. Purchasing Managers’ Index (“PMI”) – a leading economic indicator – notched multi-year highs for business activity and, unfortunately, cost inflation.
The market certainly had thoughts. Within an hour of publication, the Nasdaq doubled its losses, and by the end of the day, the yield on the 10-year Treasury had climbed 15 basis points to close at 5.11%.
A wonderful teacher once told me, “When you’re in a moment, you need to stop and recognize it.” Well, last Wednesday certainly felt like a moment. I’m a perma-pessimist, so I’m primed to see the glass half empty; but even an optimist can’t ignore a rate we haven’t seen since the Bush administration.
Could this be a Babson Break?
You, the savvy financial historian, know all about the market collapse of October 1929. You may be less familiar, however, with the events of a random Thursday one month prior – a slow news day on which the prognostications of Roger Babson precipitated a nearly 3% market drop. “Fair weather cannot always continue,” Babson warned at his National Business Conference. “Sooner or later a crash is coming and it may be terrific.”
To be clear, Babson didn’t break the bull. Stock prices recovered between his comments and the catastrophic events of Black Thursday. But did the market’s immediate reaction to his words portend the perils to come? The doomer of faith says yes.
Indeed, the true believer finds many Babson Breaks throughout history. Moments that precede “The” moments. The discontinuities we identify post-mortem.
Consider, for example, the panic of 1907. You may be familiar with the crisis’s most proximate catalyst, the closure of Knickerbocker Trust on October 22. But you may know little of the rumors linking Knickerbocker’s president, Charles Barney, to a failed attempt to manipulate United Copper stock the preceding week. A failed attempt that led, as reported contemporaneously by The Wall Street Journal, to “wild scenes on the Curb.”
Kneel ye at the altar of Babson.
But here’s the catch. Babson’s prophetic conference? It was his sixteenth. As Andrew Ross Sorkin notes in his tome, 1929, Babson had “been saying much the same thing for more than two years.” A broken clock and all that.
Thus, the inconvenient truth: Financial markets can’t heed my teacher’s counsel. It’s nearly impossible to recognize a Babson Break in the moment without morphing into Chicken Little.
But that doesn’t mean we shouldn’t pay attention.
Last Wednesday’s PMI may be recorded in the annals of history as a nothing burger. Another blip in an otherwise historic bull market.
But if things do shift, perhaps the PMI is the crack in the dam.
Perhaps it’s our Babson Break.