Can Changes in the Purchasing Managers’ Index
Foretell Stock Returns? An Additional Forward-Looking
Sentiment Indicator

Abstract

This article studies whether the Purchasing Managers’ Index (PMI) can lend itself usefully to the forecasting of future stock returns. Utilizing time-series regression analyses, we find a positive relationship between changes in PMI and stock returns. This suggests that optimism (pessimism) as indicated by changes in the PMI translate into higher (lower) subsequent stock returns. Additionally, after controlling for macroeconomic conditions such as the strength of the U.S. dollar, inflation, and the current state of the U.S. economy, these results persist. The results show PMI changes have a greater impact on the stocks of smaller market capitalization firms and industries such as precious metals, computer technology, textiles, and automobiles. The article examines how PMI’s forecasting role has evolved over time using rolling regressions and including changes in PMI as an additional factor in Fama and French’s popular three-factor model.