Could A Poor ISM Reading Actually Be A Positive Indicator For Stocks?

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 |  About: SPDR S&P 500 Trust ETF (SPY), Includes: IVV, VOO
by: Scott Krisiloff, CFA

ISM dropped below 50 for the first time in 2 years in June. This is certainly not a positive indication of current US economic activity, but what does it mean for forward stock market 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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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.