Back in 1948, the Institute for Supply Management (ISM) decided to conduct a survey of its members. It asks them a variety of questions about their business and purchasing trends. These answers are compiled to create what is known as the Purchasing Managers Index. The index is released on the first business day of each month, and is a timely update on the health of the US economy.
A reading above 50, suggests the US economy is expanding, while a reading below 50 suggests the economy is contracting. The chart below shows the PMI reading (black line) and US Recessions (grey shaded periods) going back to 1948.
The index tends to fall below 50 as the US heads into a recession, and generally stays above 50 during economic expansions. However, on occasion, the index falls below 50 without a recession occurring. It just so happens that the last two readings have been below 50 (August was 49.1, September was 47.8). The decline in the index coincides with the escalation of the trade war and the inversion of the yield curve (an ominous sign from the bond market that a recession is on the horizon).
Below is a chart from Google Trends that shows the number of people searching for the topic “Recession”. In August 2019, the number of searches for the term recession reached a level last seen in 2009 after the stock market had fallen more than 50%.
“Be fearful when others are greedy, and greedy when others are fearful.”Warren Buffett
Based on the level of the Purchasing Manager Index, and the Google search trends, it is safe to say that people are not particularly greedy. If anything, they might be leaning more toward fearful.
What if the ISM’s Purchasing Manager Index is wrong this time? What if we are not on the cusp of a recession?
The chart below looks again at the ISM Purchasing Managers Index (black), recession (shaded grey), but this time includes the forward 12-month return for the S&P 500 (green/red). The blue ovals are periods when the ISM fell below 50, but a recession did not occur. In each instance, the forward return for the S&P 500 was +20% or more over the next 12 months.
Our Business Cycle Indicator is not warning of a recession, and thus, our data suggests the market could have a repeat of the +20% runs it experienced in 1986, 1995, 1998, 2003, 2013, and 2016 (blue ovals in the chart above).
On Friday (November 1st), we’ll get the next reading from ISM’s purchasing manager index.