What You Should Know About The ISM

  • August 2, 2005
  • Thomas Neuhaus

ISM Index
Reading Is Bullish For The Markets

One of the most important
economic indicators I track is indicating the bull market remains intact. 
July’s Institute of Supply Management (ISM) Survey rose to a better than
expected reading of 56.6, up from 53.8 in June.  The Survey measures whether new
orders, employment, and inventories at manufacturing companies are rising or
falling.  When the ISM Survey is rising, I interpret it as being bullish; when
the Survey is declining, I interpret it as being bearish. 

Despite the fact that
manufacturing is only a small portion of the US economy, the Survey still has
high information value.  As shown in Chart 1, the ISM Survey is important
because it tracks the Leading Economic Indicators fairly closely.  And based on
the ISM, the Leading Indicators should turn higher in August, implying that the
economy will continue its path of strong and steady growth.   

More importantly, the ISM
Survey also tracks the twelve-month rate of change in the Dow Jones Industrial
Average relatively well.  As seen in Chart 2, the ISM Survey has been a good
confirming indicator of stock prices over the last 10 years.  Yesterday’s rising
ISM Survey indicates the market remains in bull mode. 






















 

The Federal Reserve’s
insistence on continuing to raise interest rates is one of the biggest risks for
the market, especially if the economy slows.  The Fed has a tendency to go too
far in adjusting short-term interest rates, thereby artificially increasing or
decreasing economic growth.   Given yesterday’s strong ISM report, the Fed seems
correct in their assessment that the economy remains healthy.  That reduces the
risk of the Fed tightening too much, at this time, which has bullish
implications for the market. 

Thomas Neuhaus

Thomas Neuhaus is a
principle of Investment Management of Virginia, a registered investment advisory
firm for which he co-manages. Mr. Neuhaus’ career has encompassed all aspects of
the investment business from investment banking to sell-side research to
buy-side portfolio manager.

 

 

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