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Similar Drops In ISM Manufacturing Data

Chris Ciovacco
0 Comments|10 days ago

RARE AND RAPID DROP IN ISM MANUFACTURING

ISM Manufacturing PMI Index came in well below expectations on October 1, 2019 sparking renewed fear of a recession.

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Given the ISM Manufacturing Index was strong in August 2018 and plunged rapidly to the October 1, 2019 level, it might be helpful to know how many similar drops from above the blue line to below the black line have occurred since 1982 and how did the stock market perform over the next five years? The answer to the first question is five previous times (see chart below).

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The answer to the question how did the stock market perform over the next five years is “quite well”.  In the first two years, 80% of the cases posted positive returns. All historical cases (1982-2019) posted gains after four and five years.

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In the present day case, it took 1.08 years for ISM Manufacturing PMI to drop from the peak above the blue line to below the black line. As you can see in the table above, the three most similar “rapid drops in ISM Manufacturing PMI” cases were 1985, 1989, and 1995. The 2008 and 2016 cases required over four years to see a similar drop to what just occurred in a little over a year. If we isolate the similar “rapid plunge” cases, historical performance was more satisfying.

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The present day case has many unique circumstances and will follow a unique path. This study simply provides some additional historical context. The bearish case for a rapid plunge in manufacturing data is easy to understand and will get plenty of coverage. These studies, based on history, tell us to keep an open mind about all outcomes from wildly bearish to wildly bullish.

EXPANDED COVERAGE IN THIS WEEK’S VIDEO

This week’s CCM video will most likely provide additional context regarding the similar historical periods shown above. CCM’s weekly video is released every Friday evening between 6 pm ET and midnight. Weekly videos can be found via CCM’s Twitter Feed, CCM’s Blog Short Takes, or the Ciovacco Capital Channel.

BUT 2019 IS SIGNIFICANTLY DIFFERENT

You can make that argument about 100% of the historical studies performed about the economy and financial markets. No two periods in human and market history have the exact same combination of fundamentals, technicals, valuations, interest rates, inflation, etc. Today is always different; that is a constant in the markets.

WHAT ABOUT SMALL SAMPLE SIZES?

The limited sample size of the similar cases above is what it is. We cannot control sample sizes. There have only been three 40%-plus declines in the S&P 500 since 1950 (1973-74, 2000-2002, and 2007-2009), which also represents a very small sample size. Are we supposed to totally ignore these major declines because of the small sample size? According to Reuters, the S&P 500 was officially launched on March 4, 1957, meaning any S&P 500 study deals with a very limited historical data set. It is what it is.

When we study rare events, we acknowledge the sample size and try to learn anything that can add value in the present day. The same concepts apply to the studies above. There are countless economic and market studies that are based on small sample sizes. Typically, the small sample size argument is only raised when the results run counter to someone’s personal opinion. When results agree with someone’s personal view, the small sample size is suddenly not a problem. If you believe a study or data set is irrelevant, there is an easy solution - ignore it.

This post is written for clients of Ciovacco Capital Management and describes our approach in generic terms. It is provided to assist clients with basic concepts, rather than specific strategies or levels. The same terms of use disclaimers used in our weekly videos apply to all Short Takes posts and tweets on the CCM Twitter Feed, including the text and images above.




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Backtested results do not guarantee future results. Results are compared to the performance of the S&P 500 Index ETF (SPY) for informational purposes only. The advisor's investment program does not mirror the S&P 500 Index and the volatility of the advisor's investment program may be materially different. The securities or other instruments included in the S&P 500 Index are not necessarily included in the advisor's portfolio and criteria for inclusion in the S&P 500 Index are different than those for investment by the advisor. The performance of the S&P 500 Index ETF was obtained from published sources believed to be reliable, but which are not warranted as to accuracy or completeness. All references to the S&P 500 Index ETF SPY are to the total return form of the ETF, meaning the impact of dividends is included. Unless noted otherwise, the returns of indices presented herein do not reflect fees or transaction costs, nor net dividends, if any. A description of each index follows: The S&P 500 Index, a diversified index that includes the stocks of 500 U.S. listed, large capitalization companies in major industries. Past performance, including hypothetical past performance, is not indicative of future performance. There can be no assurance that the advisor will achieve its objectives. Any performance information, market analysis or data or other information is not warranted by Ciovacco Capital Management, LLC (CCM or Ciovacco Capital) as to completeness or accuracy express or implied, and such information is subject to change without notice. CCM's investment strategies may change from time to time based on market conditions and enhancements to its investment methods and strategy without further notice. This website and the information contained herein are for informational purposes only and do not constitute a complete description of our investment services, funds or strategies. 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