The Durable Goods report for November was released on December 27 and markets were somewhat disappointed. Last month I wrote a post where I took a look at the implications for tech stocks based on the October numbers. I'd like to take the same approach here.
The primary category I look at is Computers and Electronic Products and the three sub-categories Computers and Related Products, Communications Equipment and Semiconductors.
First, I was surprised to see how the annual numbers stacked up. On a year-to-date basis, 2007 has barely kept pace with 2006. The Computers and Electronic Products category shows shipments up only 0.6% and new orders flat. In all three sub-categories, both shipments and new orders were down anywhere from 1.4% to 4.5% (note that new orders are not available for the semiconductor industry.)
This data seems in conflict with one of the major investing themes of 2007: tech stocks were strong while financials were weak. Hence the outperformance of the NASDAQ in comparison to the S&P 500.
Digging into the monthly numbers, we see some improvement in November compared to October. In fact, things look significantly better when comparing the November-October time frame to the October-September time frame. Except for Semiconductors, shipments, and especially new orders, had slipped quite a bit in the October-September comparison.
In an attempt to see what's next for tech, it is useful to look at new orders, a value which also contains unfilled orders. This number provides a mixed picture. For the overall Computers and Electronic Products category new orders came in at -1.2%. For Computers and Related Products it came in at +9.8%. That is quite a wide range but the strong numbers for Computers and Related Products probably reflects a successful Christmas selling season for PC vendors and resellers.
Based on this Durable Goods report, it seems clear that tech in general will not provide consistent across-the-board results. Some sub-sectors will show growth and some will not; some individual companies will show growth and some will not. This report seems to validate a post I wrote earlier in December titled "Tech stock outlook increasingly fragmented."
On a final note, looking at historical data it can be seen that December is almost always the strongest month of the year for Computers and Electronic Products shipments and new orders. The first months of the next year are often weak in comparison. If that pattern repeats and especially if December numbers are below expectations, we could see some real volatility in tech stocks. Keep an eye out for those next reports.