Is a Lower ISM Reading Another Headwind for Equities?

The Institute for Supply Management’s (ISM) Manufacturing Index hit a cycle high of 60.8 in February. March data, released yesterday, fell short of consensus expectations (59.6) at 59.3, but remains firmly in expansionary territory.  However, with equity market weakness and a recent resumption in yield curve flattening, some may be questioning if an ISM peak could pose an additional headwind for stocks.

John Lynch, Chief Investment Strategist commented, “The March ISM reading showed continued strength in the manufacturing sector. But for those who may be concerned that the number was lower than February, history has shown that a peak in manufacturing doesn’t indicate that a recession is imminent. Volatility may continue to test investor resolve in 2018, but we maintain our view that stocks could see double-digit returns this year.”

Over the past five economic cycles, it has taken the United States 45 months on average to enter a recession following a peak in the ISM. Meanwhile, the average cumulative S&P 500 Index price return during those time frames (using end of month returns) was 56.7%, as shown in the table below. Note that this average includes periods of very strong returns in the mid- to late-‘80s and ‘90s, and one period of negative returns in the early ‘80s, which is an indication that not every cycle is equal. However, the overall story remains that a peak in ISM manufacturing does not typically mean equity gains are over or that a recession is around the corner.

It may still be early to call a peak in ISM for the current cycle with the March reading landing not far from recent highs. However, given concerns about a potential peak in ISM coinciding with recent equity market weakness and a flattening yield curve, we thought it would be a good time to remind investors that economic fundamentals remain solid; even if February’s ISM reading ends up being the cycle peak, there may still be opportunity for stocks moving forward.

 

IMPORTANT DISCLOSURES

The Institute for Supply Management (ISM) Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

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