FAST - A Positive Rate Of Change In Manufacturing

2023-10-17 08:59:42 ET

Summary

• Stocks rise despite concerns about interest rates and geopolitical strife.
• Earnings revisions breadth is deteriorating, but this is typical before earnings season.
• Manufacturing sector shows signs of rebound, with PMI increasing and sub-components improving.

Stocks drove through rising bond yields to power sharply higher yesterday, as strong corporate earnings trumped concerns about interest rates. Despite intensifying geopolitical strife and dire warnings from corporate leaders and market pundits about the economy and the markets, the fear one would expect to see is absent with the CBOE Volatility Index collapsing more than 10% yesterday. The seasonally strongest three months of the year for stocks are right in front of us, and it feels like the year-end rally has begun.

The perennial bears at Morgan Stanley are doing their best to stomp on the earnings parade that began last week. Strategist Mike Wilson indicated that earnings revisions breadth has deteriorated over the past several weeks, which he says is a bad sign. In other words, analysts are lowering estimates for more companies than they are raising estimates, as the earnings season begins. That might be a bad sign, if it wasn’t what typically happens in advance of every earnings season, as the chart below shows. This is a negative rate of change that is irrelevant, because analysts like to lower numbers near the end of nearly every quarter so that companies can exceed those estimates. This is par for the course, and I think bears are grasping for straws.

A positive rate of change that I think is noteworthy right now comes from the manufacturing sector. Earlier this year, I surmised that we would see a rebound in US manufacturing around the same time the service sector started to slow under the weight of tighter financial conditions. It looks like that is what is happening after nearly a year of contraction for the manufacturing sector. September’s survey of purchasing managers (PMI) from the Institute for Supply Management (ISM) resulted in an increase in the index to 49.0, which was the 11th month of contraction, but at the slowest rate recorded since November 2022. The level of demarcation between growth and contraction is 50.0, and we are on the verge of rising above it.

The sub-components of employment and production have already risen above 50.0, and new orders is on the verge of growth as well at 49.2. The restoration of growth in the manufacturing sector will be vital in the fourth quarter, as service sector activity slows further. The latest data is encouraging.

Another positive sign for the sector was last week's earnings report from Fastenal ( FAST ), which operates more than 3,000 stores nationwide selling thousands of items to a broad array of industrial customers. Its sales growth is an excellent pulse on manufacturing, and the stock rose to an 18-month high last week after reporting earnings results that exceeded Wall Street's estimates.

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