Sometimes even ‘bad’ economic data can be good news for certain parts of the stock market.
Take the Institute for Supply Management manufacturing purchasing manager index, or ISM PMI. Industrial investors wait anxiously each month for the report to be released so they can get a read on the health of the U.S. industrial economy. The December PMI number was released on Friday. But the U.S. military killed Iranian military officials on Friday too, causing oil to jump 3% and roiling the entire stock market. The Dow Jones Industrial Average fluctuated by almost 1% over the day, making it difficult to discern how the market viewed the PMI report.
The number didn’t look great. The index registered 47.2, the fifth straight month below 50. A level above 50 indicate the manufacturing sector is growing. Industrial stocks dropped Friday too. The Industrial Select Sector SPDR ETF (ticker: XLI), fell about 0.3%, a little better than the comparable drops of the Dow and the S&P 500.
And Friday’s declines are all about oil and the geopolitical tensions. Industrials did a little better than the market because, very roughly, 20% of all industrial revenues are generated in energy end markets. Industrial companies don’t fear higher oil prices, as long as it doesn’t choke off overall economic growth.
So what should have been the right reaction to the weak December PMI number? Industrial stocks should have gone higher of course. Because it looks like the bottom is here.
“Feels pretty good,” Tim Fiore, chair of the ISM manufacturing business survey committee, told Barron’s Friday, reflecting on the December numbers. He hasn’t felt as good in recent months.
For starters, layoffs at manufacturing establishments were worrying him, but the employment data—which is one component of the overall survey—improved. “About 44% of [survey respondents] were planning reductions in November, most tied to layoffs,” explained Fiore. “About 33% were planning reduction in December, most tied to attrition.” There isn’t as much pressure on workers entering the new year.
What’s more, Fiore pointed to low customer inventories and rising raw material prices as two additional signs things will improve in 2020.
The dive below the headline number is helpful for investors who have added industrial exposure to portfolios in recent months. Heavily cyclical industrial stocks have outperformed the broader stock market in recent months. Machinery components of the S&P, such as Caterpillar (CAT), rose about 12% in the fourth quarter, 3 percentage points better than the S&P 500.
Investors often like to buy cyclical companies when the data looks the worst, like the manufacturing data did in the latter half of 2019. Of course, for that strategy to work the data must improve. And it looks like it will in coming months.
Write to Al Root at allen.root@dowjones.com
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January 06, 2020 at 06:32PM
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‘Bad’ Manufacturing Data Contained Good News for Industrial Stocks. Here’s Why. - Barron's
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