Investors have been optimistic about the Industrials sector in recent months, as the industry has seen improved returns relative to historical performance. This is in part due to the Chinese government’s measures to drop Covid testing requirements and accelerate elderly vaccination, as well as expectations for a boost from US legislation designed to incentivize reshoring of manufacturing and the shift to green energy. Additionally, corporate CAPEX has been strong recently and may provide an additional tailwind for the sector in the near term.
Despite this optimism, investors should be aware of potential headwinds from a slowdown in CAPEX growth as well as margin pressures and geopolitics risks in certain sub-sectors such as Aerospace & Defense. As a result, investors should be selective when investing in the Industrials sector, focusing on firms with strong sales growth that have been historically correlated to CAPEX growth and other macroeconomic drivers. This strategy has proven successful so far this year, as the median stock on our list of highly correlated stocks has returned 18% QTD compared to 13% for the median S&P 500 stock and 17% for the median S&P 500 Industrials stock.
Going forward, investors should continue to monitor CAPEX growth as well as individual company performance to identify attractive opportunities in this dynamic sector. Overall, although headwinds remain, there is still potential for Industrials firms to benefit from an extended period of strong CAPEX growth in the near term.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Housing Starts and Permits
In November, housing starts are estimated to have declined to 1.38 million seasonally adjusted annual rate from 1.43 million previously. Starts have generally continued downward for the past few months as high mortgage rates inhibited potential customers’ demand. Our forecast is that the cooling-down of the housing market will continue until it reaches a new level of equilibrium; this is corroborated by building permit data which also points to some weakness in trajectory going forward. Building permits in October are expected drop to 1.48mn, down from 1.51mn last month.
Consumer Confidence
We’re hoping to see December’s Conference Board confidence mildly improve to 102.0 from 100.2 previously. Consumer confidence has dwindled since September, but this month’s report looks promising with some inflationary relief in sight.
Consumer Confidence
Although consumer confidence has been slowly declining since September, we think December’s Conference Board report will show some improvement due to upward inflation expectations.
GDP 3Q (T)
We predict that 3Q gross domestic product will be revised upwards to 3.1% from the 2.9% second estimate. This is mostly due to an increase in structures, residential investment and government spending matching our estimates; meanwhile, personal consumption expenditure remains at 1.7%.
U. of Michigan Sentiment
The University of Michigan’s consumer sentiment is predicted to end at 59.2 in December, which is higher than the prior month’s reading of 59.1. In December’s preliminary reading, sentiment had risen from 56.8 as of November 30th. The expected increase is due to the better-than-expected November CPI data and inflation expectations for next year have lowered.
Global Spotlight
On December 17th, Tunisians will vote for parliamentary elections. Despite President Kais Saied’s authoritative rule, it is predicted that the newly elected parliament will be much weaker. Saied has been working to return Tunisia’s political system largely to its pre-Arab Spring form by suspending the parliament in July 2021 and expanding executive powers while minimizing parliamentary powers. The president’s new electoral law, which is backed by Saied, has caused many Tunisians to boycott the ballot because they see it as a way for the president to install a legislature that will lack real political power in the future. There may also be some unrest while the votes are being counted over the next week.
Dec. 19 is set as the date for another European Union energy ministers meeting, in hopes to establish the boundaries for a market correction mechanism (a natural gas price limit throughout the bloc) that was proposed by the European Commission last month. This follows an unfulfilling meeting on Dec. 13th. The capitals of the European Union are still divided over whether to introduce a price ceiling and if it is introduced, what shape it should take. Brussels has been facing pressure for months from most member states who want a price cap that would help control rapidly rising energy costs in Europe. On the other hand, some countries oppose this idea because they believe that such a measure could discourage suppliers from delivering gas to Europe. The European Commission’s original plan proposes an ”emergency” price ceiling on the Dutch TTF’s month-ahead futures contract, with a fairly high threshold for activation (275 euros per megawatt hour) and emergency clauses that would allow Brussels to suspend the measure at any time if it was found to endanger the bloc’s natural gas supplies. The upcoming negotiations will most likely result in an agreement that eases the conditions attached to the activation of this type of cap, with a lower threshold range being between 180 and 220 euros per megawatt hour. The Intercontinental Exchange (ICE) has stated that if a price cap is approved, its gas trading hub may have to be relocated outside of the European Union. This Admission emphasizes the market controversy and potential risks for it to result in undesired market reactions.
Putin visits Belarus. Russian President Vladimir Putin will make his first visit to Belarus since 2019 for formal meetings with Belarusian leader Alexander Lukashenko to discuss the countries’ alliance and further their integration within the Union State. During the visits, it is likely that statements will be made affirming that the countries’ 2021 integration agreement–which details 28 policy harmonization programs–is still on track. This is despite increasing difficulties, like implementing a unified gas market between Belarus and Russia by 2023. Lukashenko will try to make it appear as though Belarus is independent, but the meeting will show that they are in submission to Russia. Russia’s goal for the meeting is to get Belarus on its side in the appearance of the war against Ukraine.
In response to the continuing anti-government protests in Peru, Congress and President Dina Boluarte will probably agree on a date for early general elections within the next week. According to electoral authorities, the earliest possible date they could hold these elections would be December 2023. However, conservative members of Congress have proposed elections in 2024 instead. This would be considerably less effective in calming down the Peruvians who have been protesting over the past week. They are demanding early elections and the release of the country’s former president Pedro Castillo. He was impeached and detained on Dec. 7 after trying to carry out a self-coup. When demonstrations take place in southern Peru, it can disrupt the supply chain both domestically and for exports going through ports or across the Bolivian and Chilean borders. However, these protests will likely stop once a date is announced for early elections, as this is one of the main demands of the protesters.
Stratfor.com
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Week’s Numbers
Review Last week’s numbers here.
Earnings
Aggregate Estimates and Revisions
- 22Q3 Y/Y earnings are expected to be 4.4%. Excluding the energy sector, the Y/Y earnings estimate is -3.4%.
- Of the 499 companies in the S&P 500 that have reported earnings to date for 22Q3, 70.9% have reported earnings above analyst estimates. This compares to a long-term average of 66.2% and prior four quarter average of 78.1%.
- During the week of Dec. 19, nine S&P 500 companies are expected to report quarterly earnings.
Source I/B/E/S data from Refinitiv
