Perspectives

Don’t Let Ominous Economic Signs Deter You From Stocks

By Wes Crill, PhD, Senior Client Solutions Director and Vice President

May 18, 2023

1 Minute Read

Topic

Investment Principles

The Philadelphia Fed’s survey-based Business Outlook Index¹ suggests some manufacturers have a very pessimistic expectation of the economy. The index is more negative than any time since the onset of the Covid pandemic and on par with the Global Financial Crisis in 2008. In general, negative spikes in this index have closely aligned with economic downturns. But investors shouldn’t let this ominous sign deter them from stocks.

Since the index’s start in May 1968, the outlook was negative in 165 out of 648 months. The return of the S&P 500 Index over the next 12 months was positive for 76% of these 165 observations. To put that in perspective, the frequency of positive S&P 500 returns over any 12-month span during the period was 78%. And the average magnitude of the return following negative months, 13.4%, was higher than the unconditional average of 11.5%. Just another reminder that markets price in changes in economic states before they come to fruition

Manufacturing Business Outlook Survey data from the Federal Research Bank of Philadelphia. Index is computed as the percentage of respondents indicating an increase minus the percentage indicating a decrease. Recession periods sourced from the National Bureau of Economic Research and begin the month after a business cycle peak month and continue through the business cycle trough month.

Footnotes

¹A monthly survey of manufacturers in the Third Federal Reserve District. Participants indicate the direction of change in overall business activity and in the various measures of activity at their plants: employment, working hours, new and unfilled orders, shipments, inventories, delivery times, prices paid, and prices received.

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