Is it Time to Ignore Slowing US Manufacturing & Buy These ETFs?

The ISM Manufacturing PMI in the United States may drop to 52.8 in April 2019 from 55.3 in March, below market expectations of 55, but that should not keep industrial funds from soaring higher. The latest reading pointed to the weakest growth in manufacturing activity since October 2016, due to slower increase in new orders, production and employment.

This means it was the feeblest growth in the factory activity in the Trump era. The gauge for export orders slumped below 50 for the first time in three years. Mexico/U.S. border crossing delays are causing supply chain disruption. Tariffs are resulting in increased prices, per some industry operators. Per Bloomberg economists, the data indicates “producer response to the inventory overhang that has continued to build over the past three quarters.” However, everything is not downbeat.

Upbeat Survey from Industry Players

"Raw material prices continue to come down, along with logistics costs…Overall, business [is] strong….The China trade agreement getting completed will help with stability with suppliers and costs management," per surveyed Machinery industry operators. Players from Primary Metals and Nonmetallic Mineral Products also see their order book at strong position.

Players from the Fabricated Metal Products also believe that business has held its head high. These operators expect business to expand throughout the second quarter, then level in the third and fourth quarters. Plastics & Rubber Products and Food, Beverage & Tobacco Products also see the economy and the business in good shape.

Of the 18 manufacturing industries, 13 reported growth in April. The categories that witnessed solid growth are Textile Mills; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Printing & Related Support Activities; Chemical Products; Nonmetallic Mineral Products; Plastics & Rubber Products; Machinery; Furniture & Related Products; Food, Beverage & Tobacco Products and so on.

Earnings Beats are Optimistic

Industrial products’ segment is expected to post 0.8% earnings growth in Q1 on 0.9% lower revenues, per the Earnings Trends issued on May 1, 2019. Amid broad-based fears of earnings recession, the industrial sector came across as one of the few that delivered positive earnings growth. So far, about 75% of the industrial companies under the S&P 500 are out with Q1 results, of which 83.3% have beaten earnings estimates and 44.4% have surpassed top-line estimates.

Potential U.S.-China Trade Deal

The U.S. manufacturing sector and exports are highly related to the U.S.-China trade relation. After several rounds of discussion, the United States and China are now in the final stage of negotiations.  Though hostility on tariff war went up of late with Trump raising tariffs from May 10, a trade deal is still possible. Since renewed trade tensions have caused a slump in markets in May, investors can expect a rally once an actual deal is signed an announced (read: U.S.-China Trade Optimism Boosts These ETFs).

A Dovish Fed

As the inflation picture remains subdued in the United States, the Fed has been dovish and is expected to be especially beneficial for the industrial ETFs. The sector is debt-intensive in nature and thus incurs huge interest expenses. Low interest rates would thus expand the profit margins of the companies (read: Top and Flop ETFs So Far in Q2).

ETFs in Focus

So, investors with a strong stomach may ignore latest slump in manufacturing index and dip their toe in the top-ranked industrial ETFs (see all industrial ETFs here).

Industrial Select Sector SPDR Fund XLI – Zacks Rank #1 (Strong Buy)

iShares U.S. Industrials ETF IYJ – Zacks Rank #2 (Buy)

John Hancock Multifactor Industrials ETF JHMI– Zacks Rank #2

SPDR S&P Aerospace & Defense ETF XAR – Zacks Rank #2

Invesco S&P 500 Equal Weight Industrials ETF RGI – Zacks Rank #2

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Industrial Select Sector SPDR Fund (XLI): ETF Research Reports

iShares U.S. Industrials ETF (IYJ): ETF Research Reports

Invesco S&P 500 Equal Weight Industrials ETF (RGI): ETF Research Reports

SPDR S&P Aerospace & Defense ETF (XAR): ETF Research Reports

John Hancock Multifactor Industrials ETF (JHMI): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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