ISM PMI and Stock Returns

A reader asked: “Lots of strategists and analysts look at Institute for Supply Management (ISM) data for guidance when it comes to the stock market. Does the ISM data predict stock returns?” According to ISM, their Manufacturing Report On Business, published since 1931, “is considered by many economists to be the most reliable near-term economic barometer available.” The summary component of this report is the Purchasing Managers’ Index (PMI) aggregating monthly inputs from purchasing and supply executives across the U.S. regarding new orders, production, employment, deliveries and inventories. ISM releases the PMI for a month at the beginning of the following month. Presumably, a strong/increasing PMI corresponds to strong stock returns. Using monthly data for PMI and the monthly closes of the S&P 500 Index from January 1950 through October 2010 (729 months), we find that: (more…)