Monday’s strong manufacturing report caught our attention, even as the coronavirus outbreak dominated the financial media. At 50.9, the Institute for Supply Management’s (ISM) manufacturing purchasing managers’ index (PMI) for January moved into expansionary territory (above 50) for the first time since July 2019. Trade-related components improved, likely signaling the positive impact of the U.S.-China phase-one trade deal. The forward-looking new-orders component also showed strength.
We must admit that the strong report surprised us given that economic growth expectations, particularly in Asia, have been coming down in response to the coronavirus outbreak. Many Chinese businesses have been closed, travel restrictions have been aggressive, and global supply chains have been disrupted, as we discussed in “Assessing Coronavirus Outbreak.”
We think investors should be paying attention to this positive development, even though one month does not make a trend. “We think this latest evidence of improving manufacturing health bodes well for the outlook for capital spending and corporate profits,” said LPL Financial Chief Investment Strategist John Lynch. “These elements are critical in powering this economic expansion forward, driving accelerating earnings growth in 2020, and supporting stocks at slightly elevated valuations.”
To illustrate what a manufacturing rebound might mean for stocks, we looked back at other periods in which the ISM manufacturing PMI broke above 50. As shown in the LPL Chart of the Day, after these ISM “breakouts,” stocks were higher 6 and 12 months later 90% of the time, with average gains of 5.6% and 14.7%, respectively. Since 1990, the only times stocks fell on this signal were during the 2002 WorldCom and Enron accounting scandals and the bear market following the 2001 recession. Note that this study is based on three-month rolling averages.
Whether this improvement will be sustained remains an open question. A dip back below 50 is certainly possible, particularly when considering the coronavirus impact may be a drag on U.S. manufacturing sentiment in February. Still, this is progress that may bode well for stocks in the months ahead.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
This Research material was prepared by LPL Financial, LLC.
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity
If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:
|Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value|
Tracking # 1-947349