The Dow Brushes Off Sequestration's Arrival

Sequestration's here at last -- and for the most part, the markets haven't even batted an eyelash. The Dow Jones Industrial Average (DJINDICES: ^DJI  ) fell early in the morning on the arrival of the federal government's automatic budget cuts, but positive news from elsewhere in the economy has sent the index higher. As of 2:15 p.m. EST, the Dow has pulled in modest gains of 35 points, or about 0.3%. With stocks evenly split between risers and laggards, it looks like investors are settling down and looking past the drama from Washington.

The ISM beats out sequestration
It helps that the Institute for Supply Management reported surprisingly positive numbers to brighten up Wall Street's day. February's Purchasing Managers' Index rose to 54.2%, coming in ahead of analyst projections of 52.5% and growing 1.1 percentage points from January's mark. In a measurement where percentages greater than 50% represent the manufacturing sector's expansion, last month's PMI shows output at its best mark since June 2011. New orders and production also rose dramatically, with each gaining more than 4 percentage points in February. Clearly, the manufacturing sector wasn't so worried about sequestration last month.

However, manufacturing stocks haven't rallied on the data. In fact, two of the Dow's members in the sector, Caterpillar (NYSE: CAT  ) and Alcoa (NYSE: AA  ) , are leading index laggards lower, down 1% and 1.2%, respectively, as shareholders react more to sequestration's potential blow than to the strong economic news.

While investors should rightly be wary about how government spending will impact top industrial companies, it's important to keep in mind that automatic budget cuts won't all come at once; they'll be phased in through the end of the fiscal year at the end of September. That gives companies plenty of time to adjust accordingly and make plans to stave off tough hits. While Caterpillar and Alcoa will undoubtedly be affected, any doom-and-gloom predictions are far off base.

Boeing (NYSE: BA  ) , for one, hasn't reacted negatively like its fellow industrial stocks. Shares of the aerospace giant have crept up throughout the day despite the sequester and the ongoing 787 battery failure saga. Japanese airline All Nippon Airways, the biggest customer so far of Boeing's flagship aircraft, announced that it has not considered backing off purchases of the 787 despite its announcement earlier in the week that it was canceling all flights of the aircraft through the end of May. It's a strong sign of support for Boeing, particularly after ANA further announced that it believed Boeing was making progress toward a fix.

Outside of  industrials, Johnson & Johnson (NYSE: JNJ  ) is having a good day, with shares rising 0.8% despite the health care colossus's troubles with hip implant recalls and legal fights. Things haven't gone so well for J&J in the hip implant arena recently, as the company earlier this month recalled one of its product lines sold overseas. J&J has already been fighting over the recall of 93,000 of its ASR hip implants back in 2010, courtesy of subsidiary DePuy, and with orthopedics being a major segment of the company, the negative PR isn't what investors wanted. Nonetheless, J&J's size and position in the industry make it better suited to withstand such pressures than most companies. Investors shouldn't lose too much sleep over the issue.

Is bigger really better?
Involved in everything from baby powder to biotech, Johnson & Johnson is criticized by some as being spread too thin. If you want to know if J&J is a bloated corporate whale or a well-diversified giant that's perfect for your portfolio, check out the Fool's new premium report outlining the Johnson & Johnson story in terms any investor can understand. Claim your copy, and a year of free analyst updates, by clicking here now.

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9/28/2016 5:27 PM
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