Why the Dow's Manufacturing Stocks Aren't Buying Today's Bounce

Even though the market is rebounding a bit, many important stocks aren't following suit. Find out why.

Feb 4, 2014 at 11:00AM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Yesterday's loss of more than 325 points for the Dow Jones Industrials (DJINDICES:^DJI) has raised concerns among investors about the stock market's future. The Dow has rebounded somewhat today, rising about 64 points as of 10:45 a.m. EST. But you can still see the worries about a possible slowdown in the U.S. manufacturing sector in the continuing declines in shares of United Technologies (NYSE:UTX), Boeing (NYSE:BA), Intel (NASDAQ:INTC), and Caterpillar (NYSE:CAT), all of which were still falling between 0.5% and 1% at mid-morning.

At least for Boeing and United Technologies, part of the reason for the sluggishness is probably just that they posted such strong gains last year. As investors try to assess their risk levels and rebalance their portfolios, the highflying aerospace-related stocks are a natural place to start. Moreover, both Boeing and United Tech have exposure to a global slowdown, especially if government austerity measures around the world rein in defense budgets and lead to a loss of military revenue.

Intel isn't usually seen as a manufacturing stock. But increasingly, the chipmaker has seen the value of offering its in-house production capabilities to third-party customers. As a result, it could well become suspect to the same crosscurrents that affect traditional industrial manufacturers.

Yet the U.S. manufacturing industry is at a crossroads right now. On one hand, the boom in domestic energy-production has raised the possibility of bringing low-cost manufacturing back into the U.S., especially if other countries with cheaper labor are slower in capitalizing on any unconventional energy sources they might have available in the long run. On the other hand, though, after five years of recovery, many aren't sure whether the strength in the overall global economy can last. Pressures on the fringes of small emerging markets could grow to have a much larger impact on world economic conditions, and that in turn would likely hit manufacturing first.

What these companies all have in common is that they're taking steps to try to boost their operational efficiency. Just yesterday, Intel said it would change its guidelines for compensation, starting at CEO Brian Krzanich and applying what it called a "cultural shift" that it hopes will make workers more accountable for meeting operational goals. Removing guaranteed minimum equity grants will cut costs, but it also signals an unwillingness to accept subpar results. Caterpillar has done its best to minimize costs in light of plunging revenue, and Boeing and United Tech are both aware of the importance of making the most of the opportunities they have right now, especially in the booming commercial aerospace business.

Looking forward, industrial stocks need to keep doing well if the Dow and broader markets are going to sustain a recovery. Without their support, a correction could well come sooner rather than later.

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