Manufacturing Sustains Gains as U.S. Growth Rebounds
Comment of the Day

July 01 2014

Commentary by David Fuller

Manufacturing Sustains Gains as U.S. Growth Rebounds

Here is the opening of this informative article from Bloomberg:

American factories, propelled by the strongest orders of the year, sustained gains in June and are poised to be part of the rebound in economic growth.

The Institute for Supply Management’s manufacturing index was 55.3 last month, little changed from a five-month high of 55.4 in May, the Tempe, Arizona-based group’s report showed today. Readings greater than 50 indicate expansion.

Producers of wood products, furniture, metals and machinery were among those seeing a pickup in demand as gains in auto and home sales rippled through the world’s largest economy. Growing consumer spending, lean inventories and improving overseas markets will probably keep assembly lines busy in the second half of the year.

“Manufacturing is back on track,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, the top U.S.-based ISM forecaster over the past two years, according to data compiled by Bloomberg. “It’s growing at a solid pace.”

Factories globally were also mostly on an upswing, figures today showed. In China, the world’s second-largest economy, manufacturing grew in June at the fastest pace of the year, according to a gauge from the National Bureau of Statistics and China Federation of Logistics and Purchasing.

In the U.K., manufacturing expanded in June at the strongest pace in seven months, according to Markit Economics. Factories in the 18-nation euro area cooled last month, as a deepening downturn in France offset a pickup in Spain, other Markit data showed.

The Standard & Poor’s 500 Index rose to a record, after posting the longest streak of quarterly gains since 1998, as technology and consumer shares rallied. TheS&P 500 climbed 0.8 percent to 1,975.21 at 1 p.m. in New York.

David Fuller's view

The US economy is now at least five and a quarter years into its economic recovery following the worst credit crisis slump since the 1930s.  Inevitably, it has been a slow, somewhat staggered recovery in response to all the deleveraging that occurred, and obviously not just in the USA.  Arguably, that deleveraging process has been an economically healthy corrective phase for the long-term outlook, although it has seldom felt that way as we have lived through the process. 

Nevertheless, quantitative easing has made the journey a lot less uncomfortable than it might have been, not least for investors, who now worry about the sustainability of global stock market rallies.  How serious a concern might this be, and how do we keep our analytical feet on the ground when stock market valuations increase more rapidly than corporate earning and GDP growth?

The short answer is to remain alert.  Persistent stock market rallies are unsustainable by definition.  However, history tells us that they can go on for longer than value investors expect, especially if there is an accommodative monetary policy tailwind.  Additionally, when they eventually lose momentum, for whatever reasons, they seldom retrace the entire advance. 

Wall Street’s action has been impressive recently.  Yes, there are once again short-term overbought conditions but that is a frequent characteristic of bull markets in motion.  More importantly, tests of lateral support and 200-day MAs earlier this year have been successful, leading to new highs for most US indices, as you can see from these charts of the DJIA, S&P 500, NDX 100, Nasdaq Composite and Russell 2000

These latest rallies are clearly somewhat overextended, and they are also testing potential psychological resistance from round number targets, not least 2000 for the S&P and 17,000 for the DJIA.  Therefore we should not be surprised by another reaction before long.  Nevertheless, that would have to do some clear technical damage in terms of the rising MAs, the sequence of higher or equal reaction lows, and this year’s support levels evident on these indices to suggest that top formations were developing.

(These themes are discussed in greater detail in the Audio. See also Eoin’s comments below.)

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