The week ahead is full of new manufacturing data points that could continue to drag on the industrial sector and on stocks generally. We have four regional indexes due for release plus durable goods orders.
Monday already offered results with the Dallas Fed's Texas Manufacturing Outlook Survey release. Of course, Texas is not the perfect representative for the overall American economy, though it certainly offers a bragging point. The report was a positive one, with its Production Index up to 10, from a mark of 6 the month before. New orders were also higher, with the index that keys on those up to 5.3 from zero last month. Expectations for the regional Business Activity Index were for a soft marking of 0.5, and the overall index reading came in short of that at -0.9. Even so, it marked improvement from the prior month's reporting of -1.6.
The true test for industry shares comes later in the week. We'll hear from the Richmond Fed, Kansas City Fed and the Chicago Fed Bank. Economists' forecasts are not as bad as one might expect, most likely due to what is produced in each region.
Automobile production obviously plays an important role for the Midwest, so the recoveries of Ford (F) and GM (GM) and suppliers are helping to support regional data. Likewise, the new energy boom of the middle of the nation is helping industry of all sorts, same as it does for Texas.
We note that the economists see a "better bad" result for Richmond, leaving its manufacturing sector contracting at a slower pace. Economists forecast slowing expansion for the Kansas City area, which is a "less good" positive. The Chicago PMI is expected to stick at 53, and a mark above 50 signifies expansion. Given the trends up until now, the results of the week could easily come in short of the sanguine forecasts seemingly shown here.
The Durable Goods Orders data is set for Thursday release. This report is notorious for its wild fluctuation, which is driven by the high-ticket prices of durable goods, especially aircraft and other transportation goods. In fact, last month, superb strength at Boeing (BA) drove the entire data point higher by 4.2%. However, when excluding transportation, orders were actually down by 0.4% last month. This month, perhaps again due to Boeing and its order flow, economists see durable goods orders declining by a whopping 5.0%. Again, though, when excluding transportation, orders are seen coming in higher by 0.2%. This might set up the bar for a miss, given overall trends in the global economy and in manufacturing.
The shares of industrial stocks fluctuate most on these reports. While industrials have participated in the rally since late July, they were also starting to show important faults beforehand and through the latest rise. The chart of the Industrial Select Sector SPDR (XLI) depicts this well.
Year-to-date, the XLI's 11.2% rise has underperformed the 18% gain of the SPDR S&P 500 (SPY), reflecting the relative weakness we're talking about. Because of its closer ties to the holdings of the SPDR Dow Jones Industrial Average (DIA), it compares better to the DIA's 13.4% year-to-date gain.
The shares of cyclical industrials are likely at greater risk than the market this week, because of their latest (unwarranted) gains on the ECB and Fed actions and their ongoing cyclical ties to the slowing economy. One industrial stock that tends to exaggerate such performance is Caterpillar (CAT). CAT has a beta value of 1.8, which reflects that reality. Look out for stocks like CAT this week, because the downside risk outweighs possible gains on positive data.
Investors in the industrial sector should be wary of the slew of data arriving this week, but also of the trend of deterioration we've seen in manufacturing reports, including the ISM Manufacturing Report. The ISM Report was "underwater" when last published and trending poorly. Thus, I would suggest investors take profits from recent gains and reduce risk to industrials selectively while underweighting the sector as well.