Weekend Read on US ISM

The Institute for Supply Management’s gauge of US factory activity fell to 47.2 in December, marking the fifth straight month of contraction and the worst reading since June 2009. A gauge of new orders also declined for a second straight month. It’s important to note that those numbers shouldn’t yet reflect Boeing Co.’s planned halt to production of the troubled 737 Max, which was set to begin in January. Elsewhere, Toyota Motor Corp. and Honda Motor Co. reported surprise US sales declines for December, and signs point to the industry as a whole needing to rely on incentives to close deals.

The optimistic read on those ISM numbers is that manufacturers are still working through the trade war hangover and that better days are around the corner. The IHS Markit gauge of factory activity, which has never dipped below the 50 point mark that divides expansions and contractions this year, showed only a modest decline in December from the month earlier and economists have been divided over which benchmark is more accurate. But if the corner has in fact been turned, stocks are already pricing that in and then some. “The fact is the market isn’t pricing in really any negative news,” Kathryn Rooney Vera, head of research and strategy at Bulltick LLC.

The market is pricing in a complete resolution on the trade front, no US recession, no undesired consequences from the monetary expansionary exercise that we’ve seen on a global scale.

For valuations to hold, earnings have to catch up. The worst does seem to be over for the slide in growth, but the trajectory of a recovery remains an open question. The general consensus is that the slowdown that had the biggest impact on those industrial companies on the front lines of economic swings has bottomed out and that growth could start to perk back up in the latter half of 2020. But US manufacturing executives were also expecting 2020 could bring the first annual decline in capital expenditures in 11 years, according to a semiannual survey conducted by ISM and released Dec. 9. The trade truce was inked several days after that, and a bottoming out in China would certainly help.

China has learned from the trade war – mainly, that the country needs to be less dependent on the US for goods and services. Despite commitments for $50 billion in US agricultural purchases, “China got the message that they need to diversify away,” Kirk Hartman, chief investment officer at Wells Fargo Asset Management.

The conclusion you need to keep in mind is that the US economy has a good upside potential for 2020 but be prepared for the unexpected and create solid risk management for your investments as the market has not any bear but not mega bulls either.

Source: Bloomberg