Stocks rose after manufacturing data hit the wires. The reading missed expectations, but revealed competing economic factors, and investors viewed the overall report as positive.
Dow Jones Industrial Average
rose 238.38 points, or 0.70%, to close at 34,113.23. The
added 11.49 points, or 0.28%, to end at 4,192.66, and the
fell 67.56 points, or 0.48%, to close at 13,895.12. The biggest gainer in the S&P 500 was oilfield-services firm
(ticker: BKR), which saw shares rise 8.0%.
Manufacturing activity for April missed expectations, but the data still showed a strengthening economy. The Institute of Supply Chain Management’s report showed a reading of 60.7, missing a consensus estimate for 65. But decreases in production and new orders were driven by supply shortages. This reflects strong underlying economic demand, which has been driven by reopenings, job gains and trillions of dollars in fiscal stimulus.
“While the report shows production may be constrained by the supply-side, demand remains firm and should ultimately drive stronger manufacturing activity,” Citigroup economist Andrew Hollenhorst writes in a report.
Industrial and value stocks, which typically represent mature companies in their earnings prime, performed handsomely. The
Industrial Select Sector SPDR
Fund (XLI) rose 1.0%. Dow component stocks
(HON) initially rose close to 1%, before their gains moderated to 0.4% and 0.1%, respectively. The
SPDR S&P Metals & Mining
ETF (XME) rose 5.0% as the price of copper rose. Banks had a strong day, as they are able to make more and more-profitable loans when economic demand rises and interest rates rise. The
SPDR S&P Bank
ETF (KBE) rose 0.6%, even though the 10-year Treasury yield fell to 1.61%; it had shown the capacity to rise, however, touching 1.65% before the market opened for trading.
Inflation, which the market looked through, is indeed a top concern and that could pose two problems for stocks. The prices-paid component of the ISM Manufacturing reading hit its highest level since 2008, according to Wells Fargo economists. First off, higher costs could pressure profit margins, but “the shortages are adding to existing price pressures, and manufacturers are increasingly passing costs on,” Sarah House, economist at Wells Fargo, writes. That’s a factor aiding investors’ confidence in manufacturing names. Also, if consumer inflation emerges convincingly, the Federal Reserve would be compelled to alter monetary policy that would raise interest rates, which would in turn fatten bond yields, and make stocks less relatively appealing. But the Fed’s recent statement made no reference to any consideration that it would alter policy any time soon, supporting confidence in lower rates for longer.
“Strong fundamentals, matched by aggressively supportive monetary and fiscal policy are pushing investors into stocks, industries and factors most levered to accelerating global growth, rising inflation expectations,” writes Dennis DeBusschere, head of portfolio strategy research at Evercore.
Investors should probably be skeptical of higher inflation.
Write to Jacob Sonenshine at email@example.com