The tide has turned against industrial stocks in a hurry.
In August and September they rallied on optimism that the U.S. would end its trade war with China. This month they’re cratering as the opposite belief spreads.
Administration officials including Larry Kudlow and Steve Mnuchin have sharpened their criticism of Beijing in recent days, while Axios reported President Trump wants to increase pressure on the Asian giant’s economy. Meanwhile Chinese official Zhang Qingli just told a group of investors his country’s not afraid of a trade war. In other words, neither side is backing down yet.
It matters because big industrials like Caterpillar (CAT) and Boeing (BA) export to China. Others who rely on imported Chinese components have also warned that U.S. tariffs are squeezing their costs higher and profits lower. Supplier Grainger (GWW) has been a big example of that.
But try as these companies might to blame trade policies, other forces seem to be at work. After all, groups like the National Association of Manufacturers and National Federation of Small Businesses have said little about tariffs hurting business. Both are much more concerned about a shortage of qualified labor.
Even more important, recent numbers have shown some evidence the industrial sector is slowing. For example, rail traffic rose less than 2 percent in the last two weeks for the first time since mid-January.
Factory job growth in August and September also totaled just 23,000. That’s the lowest two-month gain since June and July of 2017. (Both of these themes have been covered extensively on Market Insights.)
So put it all together and what do you have? Less prospect of selling to an ailing China, and higher costs on imported components from that country. At home, conditions are strong but may be moderating. It’s also hard to find workers. Looking out the next few quarters, investors may struggle to get excited about that story line.
Maybe that’s why CAT is down 8 percent today, despite beating estimates. That’s even worse than 3M (MMM), which missed its numbers.
Plenty more news is coming because industrials are one of the busiest sectors for earnings this week. Other names to watch in the near term include BA and Ingersoll-Rand (IR) tomorrow morning.
In conclusion, industrial stocks normally do well at times of economic growth like now. But a series of other worries seem to be trumping that optimism for now.