Monday, July 2, 2012

What Does a Poor ISM Mean For Stocks?

ISM dropped below 50 for the first time in 2 years, which is certainly not a positive indication for US economic activity, but what does it mean for stock market returns?  Since securities markets are supposed to be forward looking (with varied levels of success) many times they will have discounted dire scenarios before the data confirms a slowdown.  With negative scenarios already discounted, sometimes high readings can be a negative indicator while low readings can actually be a positive for future returns.  Below is a chart of the 12 month forward returns of the S&P 500 when ISM goes from an above-50 reading to a sub-50 reading.  In 31 tries since the 1950s, the S&P 500 has been positive nearly 2/3 of the time 12 months after the first cross over.  On average, the forward return is 9.14%.  Still, it should be noted that the last 4 times in a row that ISM has crossed below 50, forward returns have been negative.  In 2008, they were extremely negative, -44%.

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