Great Factory News: So Where’s The Rally?

A popular chart among stock market strategists got a whole lot prettier on Monday, providing the best evidence yet that U.S. corporations will face much better economic conditions in 2014. But the cheering on Wall Street was rather subdued for such happy news. There’s good reason for that.

^SPX Chart

^SPX data by YCharts

On Monday, the Institute for Supply Management’s manufacturing index, also known as the Purchasing Managers Index, for November showed an unexpected rise to the highest level since 2011. The report indicated that factories increased production, hiring and, particularly, new orders at a faster clip than any other time this year. It was also the 12th straight month of an index number above 50, which indicates growth in the manufacturing industry.

US Purchasing Managers Index Chart

US Purchasing Managers Index data by YCharts

Comparable November surveys out of China and Europe showed similar, although less dramatic, manufacturing recoveries there. That’s particularly heartening news for U.S. investors in equities because of the sales many major corporations need from those struggling economies.

Companies like General Electric (GE), 3M (MMM), Illinois Tool (ITW), Honeywell (HON) and United Technologies (UTX) all benefit directly and indirectly from heightened manufacturing activity here and abroad. Using equity research tools you can better determine how each company is performing.

GE Chart

GE data by YCharts

Each of those manufacturing reports was better than expected, and in the past, such happy surprises from the manufacturing sector could be expected to spark a rally in stocks. But this time, there’s skepticism that the manufacturing sector is as hot as the ISM data suggests. ISM polls factory managers as to whether conditions are “better,” “same” or “worse” in various areas, and the responses are appreciated for their timeliness.

Data collected by the Commerce Department suggest that as late as October, businesses were still reluctant to spend on major purchases. The durable goods orders have not shown as clear a trend toward strong recovery as the PMI.

US Durable Goods New Orders Chart

US Durable Goods New Orders data by YCharts

Then there’s the Federal Reserve’s asset buying program, which has turned market reaction contrary to history in many scenarios this year. An economic recovery as strong as PMI suggests the Fed is likely to end quantitative easing sooner, which theoretically is bearish for stocks.

And finally, investors are increasingly reminded that Congress will take up the budget debate again in January, with yet another potential for a government shutdown or other business-dampening outcome. Even if there is a strong economic recovery, there’s still a chance that Congress will mess it up.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

Read more articles about: Economic Watch  manufacturing   

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