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Tags: recession | stocks | industrial | economy

That Recession in US Industrial Economy? Stocks Show It, Too

That Recession in US Industrial Economy? Stocks Show It, Too
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Thursday, 05 November 2015 07:34 AM EST

A group of industrial stocks is posting its biggest declines since 2008, a sign that investors agree with a Fastenal Co. executive who said parts of the U.S. economy are in a recession.

A Standard & Poor’s 500 index that includes Fastenal, WW Grainger Inc. and United Rentals Inc. has fallen 18 percent so far in 2015, putting it on track for the second-worst performance in data going back to 1996. The group has the fifth-worst return this year among 67 S&P 500 industries, as weak demand from overseas customers holds back U.S. exports and manufacturing. It rose 0.4 percent to 360.99 at 9:32 a.m. in New York.

Daniel Florness, Fastenal’s chief financial officer, uttered the R-word on an Oct. 13 conference call to discuss third-quarter earnings. “The industrial environmental is in a recession,” he said. “I don’t care what anybody says because nobody knows that market better than we do.”

Recent data indicate the broader industrial sector has slowed, with manufacturing activity in the U.S. stagnating last month as factories struggle with dwindling demand overseas and customers at home that are well-stocked. Industrial output declined in both August and September, as the American economy’s expansion weakened to a 1.5 percent annual rate in the third quarter.

Losses in the S&P 500 Trading Companies & Distributors Index briefly surpassed their rout during the recession, when it fell 22 percent in 2008, as a slowdown in orders has taken a toll. Meanwhile, the broader U.S. equity market has rallied 13 percent from its August low, pushing the S&P 500 within 1 percent of a record.

Results from other industrial companies, including Cummins Inc. and Eaton Corp., corroborated Florness’s assertion for Walter Todd, who oversees about $1.1 billion as chief investment officer of Greenwood Capital Associates LLC in South Carolina.

“If anything, it’s become more clear that the industrial side of the economy and anything it touches is in a recession,” he said. While some investors “try to feel out a bottom” for industrial stocks, Todd asks how much further these stocks will fall. “The stock performance for this group has been horrendous, but it’s tracked earnings. Until you’ve got conviction that’s going to stop, there’s no reason to own the stocks.”

A further sign of trouble for the sector came as North American railcar orders plummeted 83 percent in the third quarter, the most in at least 27 years, according to the Railway Supply Institute.

“We’re effectively in a capital expenditure recession,” said Don Townswick, director of equities at Hartford, Connecticut-based Conning Inc., which manages $92 billion. Sluggish economic growth and a lack of confidence among many U.S. companies has constrained corporate spending, which “runs right down the supply chain,” he said.

“The bottom line is when you also have low GDP growth, that hits the big-ticket capital goods orders,” Townswick said.

The combination of slower global growth, a stronger U.S. dollar and overcapacity created by the low cost of capital are largely to blame, said Peter Cecchini, chief strategist in New York at Cantor Fitzgerald LP. 

“The environment for these companies right now is particularly difficult,” he said. “To ignore it would be a mistake.” That question then is, he said, “Where does that bleed next?”

So far, it hasn’t hurt a broader group of industrial companies, which have recouped their losses from the summer selloff and closed Tuesday at the highest level since June 24.

That belies a “complete disconnect” within the industry, Cecchini said. General Electric Co., 3M Co. and Boeing Co., the three largest companies by market cap in the S&P 500 Industrials Index, have accounted for more than one-third of the gauge’s 13 percent rally since Sept. 28.

“We really are a bit confounded why industrials are rallying the way they are,” Cecchini said. “I think there could be a lot more downside for the group, frankly.’’

While Greenwood Capital doesn’t currently own any of the industrial distributor stocks, paying attention to what their executives say gives Todd a better feel for the pace of economic growth, particularly as consumer data -- including housing and hiring -- has held up, he said. 

“We’ve been lamenting that it’s very hard to have conviction right now, either way," he said. “While the market has rallied very strongly and it’s pleasant to be involved in that, it’s so unclear what’s going to win out. Is the drag from the industrial economy going to take down the other part of the economy?”

© Copyright 2024 Bloomberg News. All rights reserved.

A group of industrial stocks is posting its biggest declines since 2008, a sign that investors agree with a Fastenal Co. executive who said parts of the U.S. economy are in a recession.
recession, stocks, industrial, economy
Thursday, 05 November 2015 07:34 AM
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