A Look Through Manufacturing Conditions
XLI, XLE, XLB Alpha
Welcome to The Observatory. The Observatory is how we at Prometheus monitor the evolution of the economy and financial markets in real time. The insights provided here are slivers of our research process that are integrated algorithmically into our systems to create rules-based portfolios.
Our takeaways are as follows:
Cyclical conditions have improved in the economy, with manufacturing measures showing sequential gains in line with cyclical conditions.
However, manufacturing remains exposed to weakness in sales, low levels of production, and high labor cost pressures.
Relative to these pressures, manufacturing-sensitive equities continue to price in highly favorable conditions, creating the potential for a reversal. We continue to see industrials, energy, and materials as shorts versus the broad index.
Overall, manufacturing demand and output have flatlined and could potentially improve. However, without a significant decrease in wage cost, we think these improvements will unlikely offset the pressures on profitability. As such, we expect the industrial, energy, and materials stocks to underperform the broader index, reflected in our Alpha Strategies. Our S&P 500 Alpha Strategy remains flat the S&P 500, i.e., broad recession risk remains muted. For alpha generation, we continue to find the most reward/risk in relative value. Until next time.