00:00 Speaker A
you see this um in the industrial economy, our our manufacturing economy, you do see a rebound there, Michael, just walk us through it. What are the the signs and signals to you of that?
00:11 Speaker B
Great to be on with you, Josh. Well, it’s pretty incipient at this point. Um, the PMI data was better than expected in January. The headline figure as you mentioned, uh moved over that 50 threshold. Really, we’ve had a three-year period where we’ve been mostly below 50. So almost a three-year downturn in the manufacturing and industrial economy looking like it could be coming to an end now. What was more exciting was the new orders index, which is more forward-looking, exploded upward in January to levels that we haven’t seen since early 2022 when the Fed was, you know, just about to start a rate hiking exercise that was much more dramatic, uh than virtually anyone anticipated at the time.
00:51 Speaker B
So, it’s incipient at this point, but, you know, as all of your listeners know, markets look forward. They don’t wait for the data. and this rotation into so-called old economy, industrials, materials, stocks, energy, that’s actually been underway since the fall of last year. So, as of late October, when the Infotech index made its last all-time high, uh, these old economy sectors and some defensives have been leading the way.
01:21 Speaker A
What what about the role of tariffs here, Michael? because you do point out, you know, you know, tariffs delayed this recovery. What what impact did tariffs have uh Michael on US manufacturing? And why could that effect, you know, now be ending?
01:43 Speaker B
Yeah, absolutely. I’m glad you asked that question. So I want to make it clear to all the listeners, I am not making a mercantilist trade protectionist Smoot Holly argument for US manufacturing reviving. I think we had an upswing underway, uh as we were exiting 2024 that ended up getting delayed last year because of this tariff shock. And all you really need to do is to read the commentary in the ISM reports and that will tell you all you need to know about tariffs. Yes, they are a tax. Yes, they’ve been a drag on manufacturing growth. Yes, they’ve increased input costs. And so they’ve created distortions as they always do. Really effectively, we just pushed out that stabilization and recovery by about a year. Uh but it is coming and it’s coming mainly on the back of Fed easing. In your previous segment, you were talking about the insurance cuts the Fed did last year, 75 basis points, but they also did 100 basis points of rate cuts the year before in 2024. So you have almost two full percentage points lopped off the Fed funds rate.
02:41 Speaker B
And what is that doing? We now have a yield curve that’s moved back into positive territory. Monetary growth, which was negative for an extended period of time is now positive, you know, albeit modest. So we’re already seeing a turn in the leading indicators and those leading indicators were consistent in moving with the industrial economy. So overall growth held up, uh even with all those Fed rate hikes that have now partially been taken back, but the manufacturing economy suffered and that suffering looks to be coming to an end.
03:22 Speaker A
So in terms of what this means for investors, Michael, so you’ve been calling, you know, for this rotation into the the old economy sectors. Just in plain English, Michael, what what do we mean by that? Like which sectors would we be talking about?
03:41 Speaker B
Yeah, I think namely the sectors that have underperformed through this period of industrial weakness, energy, huge underperformer, materials, big underperformer. Um industrials, you know, also an underperformer until recently. So that’s really what I mean in terms of old economy and they represent just a tiny share of market cap, about 14%. The material sector is 2% of total US market cap. I mean, it’s like nothing. There’s no exposure there. Uh so this theme could could have some legs to it, uh and investors are really not positioned for it in in any way.
04:36 Speaker B
And just to be clear, you know, I’m not bearish on tech. When we made this call in the summer of last year, the call was really that Infotech valuations had moved up above a 30 forward multiple. That’s kind of where we’ve been when pullbacks or corrections have happened in the past. And we just went through some valuation compression now on the Infotech index. And so I’m not adverse to adding there. Uh and I’m not bearish on tech. I just think that investors need to broaden their horizons a little bit, uh and widen the portfolio exposure a bit. We don’t want to just be loaded up on any one particular sector. and that sector now is dominating US market cap, Infotech and com Services is about 40% of the S&P 500. So you can have these stealth rallies underway and it doesn’t look like much in in the in terms of the level of the the index because they just don’t have the market cap to, you know, to make a lot of noise.