Investors confused by the lateness of Thanksgiving Day can be forgiven if they forgot the calendar has turned to December. That means a lot of economic data is coming before the extra calories from the holiday meal have been worked off.
Figures on the industrial economy, in particular, come with higher stakes than normal. Stock prices in the sector have rallied even as macroeconomic data has wavered.
The Institute for Supply Management purchasing manager index, or PMI, is due to be released on Monday. It has come in below 50 for the past three months, indicating the industrial economy is shrinking. A figure above 50 would point to growth, but economists expect the index to come in at 49.2 for November, compared with 48.3 for October.
Four months of shrinkage might seem bad for industrial shares, but the sector is rallying. The Industrial Select Sector SPDR ETF (ticker: XLI) is up 10.4% since early October, following a sharp sell off catalyzed by a bad PMI number. The S&P 500 and Dow Jones Industrial Average are up 8.9% and 7.7%, respectively, over the same span.
The counterintuitive move can be explained—in part—by the fact the market is forward looking and the industrial data might be bottoming out. Investors often want to buy the most economically sensitive stocks before the figures improve so that they can ride the wave as more favorable news emerges.
“Events....have de-risked S&P Cyclical sectors,” wrote Barry Bannister, Stifel’s head of institutional equity strategy, in early October, after the selloff in industrial stocks. He recommended at the time that investors allocate more money to cyclical sectors—like industrials—arguing that all the bad news was reflected in current stock prices.
He still feels the same. “Although we see [better than] 5% further for the S&P 500 into 2020,” wrote Bannister last week, “we see twice that return, or plus 10%, for a long-cyclical/short defensive industry trade in the same period.” He’s saying investors should buy industrial stocks and pull back from defensive sectors, such as consumer staples.
The big danger he sees regarding his idea is bad news regarding the U.S.-China trade war. That has been a risk for the industrial economy for the entire year.
“Automotive-related manufacturing is definitely slowing in the U.S.,” the ISM PMI October survey report, released in early November, quoted one respondent as saying. “I think we are seeing the negative impacts of the tariff war with China and the unsigned [U.S.-Mexico-Canada] deal starting to hurt consumer confidence, especially on large purchases. Corporations are slowing orders/production accordingly.”
The comments on trade and tariffs will be worth watching when the November ISM report is released. So will any further signs of a turnaround in U.S. industrial demand.
Most important, investors can watch to see if the result comes in at 49.2 or better. If it does, as economists expect, it would mean things are getting better. That should be enough to keep industrial shares moving higher through the end of the year.
The report is based on a survey of 800 businesses. Manufacturers in 18 industries say whether things are getting better, worse, or staying the same in terms of things such as hiring, sales, orders, pricing, and inventories.
One business gets one vote. Results aren’t weighted by size, so a figure of 50 means equal numbers of respondents reported conditions had improved or worsened.
Write to Al Root at allen.root@dowjones.com
2019-12-01 13:15:00Z
https://www.barrons.com/articles/ism-pmi-industrial-economy-expand-contract-monday-51575059987
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