- July 29, 2019
- Blog , The Portfolio Strategist - Terry Gardner
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C.J. Lawrence Weekly – Industrial Stocks Challenged by Slowing Global Manufacturing Activity
The market playbook was challenged last week. Under the “old rules”, Friday’s release of better-than-expected second quarter US GDP should have nudged up U.S. treasury bond yields and caused gold prices to cool. But the yield on the benchmark U.S 10-Year treasury bond was flat on Friday and was up only 3 basis points for the week. Gold, meanwhile, finished the day up fractionally, having rallied 10.6% year-to-date, despite a weak PCE deflator and limited inflation on the horizon. The equity markets appear to be looking through current economic data, fixating instead on this week’s Federal Open Market Committee meeting and the prospect for the first interest rate cut since December of 2008. The U.S. consumer has done much of the heavy lifting for the U.S. economy to date and did not disappoint in the most recent GDP release. Business spending, on the other hand, continues to cool, and recent purchasing manager index results suggest the chilling may continue, giving the Fed ammunition for a rate cut.
The rapid decline in global manufacturing PMIs encouraged the International Monetary Fund to tweak its global GDP forecast down by 0.1% to 3.2% last week, despite taking a more optimistic tone on the U.S. economy. China, the globe’s largest manufacturing economy, saw its PMI index fall back below 50 in June, 4.1% below last year’s level. While China’s manufacturing base has been shifting its focus towards domestic consumption, the departure of name-brand manufacturers could crimp output growth and business optimism. Artificial intelligence company, dMetrics, Inc., tracks announcements and mentions of global companies withdrawing operations from China. The company’s unique natural language processing (NLP) engine gleans intent and action from text, producing streamlined results. Their recent work shows an elevated level of activity coincident with the breakdown in U.S.-China trade discussions and indicates a sustained high level of departure intent. Persistent weakness in the world’s largest manufacturing economy could curtail regional economic growth as well as challenge global economic growth assumptions.
Earnings results from companies most exposed to the global manufacturing sector are reflecting the business challenges. With over 63% of S&P Industrial Sector constituents having reported 2Q19 results, blended earnings per share growth (which combines reported results with estimates for companies that have not yet reported) is coming in 12.3% below last year’s levels. If the trend in earnings reports continues, the sector will be on track to generate flat earnings growth for the year, versus a 2019 forecast of 7.2% growth projected at the end of March. Heavyweight Boeing represents a large part of the reduction, and its ripple through the supply chain is being felt throughout the Aerospace and Defense and Electrical Equipment groups. The S&P Industrials Sector Index price is up 1.5% since March 30, versus a 6.2% improvement for the S&P 500 during the same period. During sector price downdrafts, Industrials investors may want to focus on the consumer centric Airlines and Commercial Services and Supplies groups, both of which show good two-year earnings growth forecasts and better prospects for outperformance.
Terry Gardner Jr. is Portfolio Strategist and Investment Advisor at C.J. Lawrence. Contact him at email@example.com or by telephone at 212-888-6403.