Investors commonly seek signs they hope can provide guidance as to the equity market’s likely path, but as seasoned investors know well, no single item has the prognostication accuracy to be relied upon in every instance.

Investors commonly seek signs they hope can provide guidance as to the equity market’s likely path, but as seasoned investors know well, no single item has the prognostication accuracy to be relied upon in every instance. Among the many economic measures the market considers, the Institute for Supply Management (ISM) manufacturing index, however, is notable. Through its 72-year history, the ISM has many times provided solid evidence of what direction the stock market might take.

The ISM manufacturing index is a composite measure that gives equal weighting to seasonally adjusted data on new orders, production, employment, supplier deliveries, and inventories. Theoretically, a reading above 50 suggests expansion in manufacturing, while a reading below 50 suggests a contraction. Although many people consider 50 the demarcation level, over time, 47 has appeared to be the more accurate separation between expansion and contraction.

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