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How do stock markets react when economies reach a peak?


At 60.8, February’s ISM manufacturing index reading was the highest since 2004 and near to a record high since the 1980s (61.4). The index is unlikely to remain at such a level for any great length of time and a gradual decline in the upcoming quarters is likely. Would a drop in the index disappoint the market enough to weigh on equities? We doubt it.

History tells us that once the ISM manufacturing index reaches a high, stock markets are just as likely to move higher as they are to move lower. We have examined the data since the index was established in 1948 and identified 18 peaks in the index reading. In 11 of these cases, stock markets had moved higher a year later. The graph below presents the average change over the year immediately after each of the index peaks, as well as the best and worst cases.

stock markets



Peaks in these readings do not signal economic turning points. In the previous cycle, the ISM manufacturing index reached a high in May 2004, a full three and a half years before the US economy tipped into recession.

Analysis based on the Citigroup Economic Surprise Index, which measures the number and size of positive and negative surprises as economic data are released, produced similar results. When the Citigroup index reaches a high and begins to reverse, it means that economic releases are no longer surprising to the upside and are starting to fall short of expectations. We identified 23 peaks since this index was created in 2003 and in 17 of these, the stock markets moved higher in the following year.

This does not mean that the economy is irrelevant to markets. On the contrary, we believe that the business cycle is the primary factor explaining asset class performance. It is important, however, not to overreact when economic indicators start to return to normal levels.



The opinion expressed above is dated 9 March 2018 and is liable to change.

This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Frères Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Frères Gestion SAS.

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Julien-Pierre Nouen

Directeur des études économiques et de la gestion diversifiée