(Photo by David McNew/Getty Images)
Mike Montgomery described the current troubles in the U.S. manufacturing sector as more like a fender-bender than a multi-car pileup.

Have We Bounced Off the Bottom? Market May Be Showing Some Early Signs

March 11, 2016

While it’s still way too early to say the good times are ready to start rolling again, some signs are starting to appear that we may be bouncing off of the bottom of the current economic cycle. Only time will tell if the recent increases in some industry stock prices and the prices of copper and oil will stick, but they are a welcome respite from the all the recent bad economic news.

A quick check of electrical stock prices last week showed that several companies are seeing significant increases in their 50-day and 200-day moving averages, with some companies that had really been hammered over the past year showing double-digit increases in both moving averages.  The prices of these stocks seemed to have bottomed out around the third week of January and have been climbing since.

On March 3, Cree Inc. (CREE) was up 10.3% for its 50-day moving average and 19.6% for its 200-day moving average; Generac (GNRC) was up 16.2% and 17.8%; and General Cable (BGC) was up 29.5% and 15.9%. On the distributor side,  Fastenal Co. (FAST) is attracting all sorts of attention on Wall Street because of its recent move and was up 11% for its 50-day moving average and 16.8% for its 200-day moving average. W.W. Grainger (GWW)  and WESCO International were showing more moderate progress, with Grainger up 8.8% for the 50-day and 6.5% for the 200-day moving average. WESCO was up 16% for the 50-day and 1.8% for the 200-day.

Copper is looking a bit better, too. After sliding below $2 per pound in early January, by the end of the month the spot copper price had cracked two bills again and is now trading above $2.20. In his Feb. 19 Copper Journal Monthly Report,  John Gross, publisher, said, “Most markets exhibited further evidence of firming last week. Indeed, although the headlines remain negative and continue focusing on severe challenges facing the global economy and commodity markets, the charts are telling a more encouraging story.

“Take a look. Short-term support lines are holding; some markets are rising above resistance, and others are now testing previous highs. Will it continue? Who knows? But if you listen carefully, you can almost hear the Captain shouting, ‘Steady as she goes’ to the crew.”

Two weeks later, Gross still saw encouraging signs in the metals market. As he told readers of last week’s Copper Journal Monthly Report, “February was a heck of a lot better than January for metals. Across the board, with the exception of nickel, average prices rose last month, and also with the exception of nickel, warehouse stocks of metal are down from year ago levels. Further, copper held the $2.00 line; aluminum, lead, tin and zinc are now above their five-month moving averages, as are silver, gold, and platinum.

“Are we looking at a change in trend, or simply a temporary correction? From where we sit, a strong argument can be made to justify either side of the debate, without drawing a firm conclusion. The one thing that history teaches us is that changes in technical signals, or chart patterns, often precede our perception of changes in the markets fundamentals. What do they say? Expect the unexpected.”

Alas, not all the market indicators are flashing green, particularly in the industrial market. Check out this more sobering but very insightful and amusing commentary by Michael Montgomery, U.S. economist, IHS Global Insight, on the latest Purchasing Managers Index:

“Chronic weakness in manufacturing, as represented by the ISM-Manufacturing Purchasing Managers Index (PMI), is starting to become monotonous. The ISM, a monthly survey of the nation’s purchasing managers published monthly by the Institute for Supply Management, Tempe, Ariz.,  bounced up 1.3 points to 49.5 in February but scored a fifth consecutive month under 50, the dividing line between growth and contraction.

“Orders and production have not done badly in early 2016 and both held over 50, albeit not much over 50.  The almost-decent orders and production readings are not quite as good as they look on the surface, as backlog (unfilled orders) sank for a ninth consecutive month. Inventories, employment and vendor performance remained below 50 for a ninth consecutive month and for the eleventh time in the past twelve months; the short term is living off of its seed corn.

“The PMI is not, and has not been, describing a full-blown recession, but what has been a nasty spot. Full manufacturing recessions are multi-car pileups and this period has been a bad fender-bender. Fender-benders are not bad for all parts of the car, but they are severe for the fender, its shock absorbers, and the nearby sides of the vehicle. With weak imports and lost foreign sales from a strong dollar being compounded by an inventory adjustment, the materials producers are the fender, exporters are the sides of the vehicle, and the transportation system is the shock absorbing system.

“Damage to transportation is often forgotten when talking about manufacturing, but one mode or another moves the raw materials, components, semi-finished parts, and finished goods back and forth multiple times in the supply chain. Construction supplies and motor vehicles are on the opposite side of the vehicle and partly compensate in industry aggregates, but a bad fender-bender is acutely and painfully felt by the fender and anything near it.

“The bad news is that this is all happening in slow-motion and is not over yet. It does not appear that the bad news will end before midyear and only then can repairs be made to the damaged parts.”

All in all, business feels like it is starting to firm up in some areas and that an all-out recession in the U.S. economy isn’t in the cards. But the recovery will probably be frustratingly slow.