What happened
Shares of industrial giants 3M (MMM 0.57%), Caterpillar (CAT -0.11%), and Deere & Company (DE 0.94%) were rallying hard on Friday, up 8.5%, 8.2%, and 5.2%, respectively, as of 3 p.m. ET.
Friday's news was particularly good for 3M but also for industrial stocks in general. Today, 3M jumped on a Bloomberg News report that it may settle a massive pollution lawsuit for less than was feared by the markets.
While the lower-than-feared settlement news might have lowered perceived risk for peers, the other industrial stocks were likely higher due to today's better-than-expected jobs report, allaying fears over a potential economic downturn.
So what
On Friday, Bloomberg News reported 3M might settle lawsuits over water pollution with several states and municipalities for just $10 billion. If it holds, this amount would be far less than the $25 billion or higher projected by some financial analysts.
3M had become the target of lawsuits over per- and polyfluoroalkyl substances (PFAS) -- used in various industrial products, such as firefighting foam -- of which 3M is the largest manufacturer. However, many cities and municipalities are now experiencing high levels of PFAS in their water and are suing the major PFAS manufacturers, including 3M.
So, the $10 billion settlement might actually be "good" news; however, it's possible this won't be the final figure, as several analysts also noted today that some towns, cities, and individuals could hold out for more. For its part, 3M has acknowledged the harm of PFAS and committed to remediating pollution, working with cities on water treatment, and phasing out its production of PFAS by 2025.
Despite the continued uncertainty, beaten-down 3M had been down some 20% on the year and 64% from its highs, so it rose in a "relief" rally on the potential good news.
In addition, fellow industrial giants Caterpillar and Deere, as well as most other cyclical stocks, also rose in response to this morning's blowout jobs report. The economy added 339,000 new jobs in May, much higher than the 190,000 expected. While that may have stoked fears that the economy is still running too hot, wage growth also moderated, and the unemployment rate actually went up from 3.4% to 3.7%, perhaps suggesting increased availability of workers.
Decelerating wage growth without job losses is potentially a "soft landing" scenario in which inflation may decrease without a big rise in unemployment, and it was clearly embraced by the markets today. Caterpillar and Deere largely depend on capital expenditure decisions of other large companies and were under pressure all year over these recession fears, especially since the regional banking crisis back in March, and down 11.8% and 17.5% on the year, respectively.
Today's report seemed to hint that a recession might be avoided, so those beaten-down, cyclical stock types got a large bid today as investors rotated out of tech and AI stocks, which have soared recently, and into cheaper alternatives.
And, of course, the Senate's passage of the Fiscal Responsibility Act -- and what seems to be the final resolution of the debt ceiling standoff -- last night is also removing an overhang on economically sensitive stocks.
Now what
If a deep recession can be avoided, industrial stocks look attractive for investors today. While the fears over a potential recession and other indirect factors, like the regional banking issues, have caused these leaders to sell off this year, increased construction and the modernization of energy and food production should have long-term tailwinds. There is an immense need for, as well as a potential added boost from, the already-passed Infrastructure Investment and Jobs, CHIPS, and Inflation Reduction Acts.
Yet, for 3M specifically, I would urge caution. Today's Bloomberg report is a rumor, and the company could very well wind up paying more than the $10 billion figure floated today -- maybe much more. As a sign of potential trouble, the company recently announced a restructuring plan and has announced that it intends to sell its healthcare business to raise funds as early as 2024.
Given the unpredictability of 3M's legal issues, it's probably far safer to play category leaders like Caterpillar and Deere, which trade at below-market mid-teens price-to-earnings ratios.
