Equity Markets Take Stock in April While Manufacturing Wavers

North America’s stock markets were flat or slightly lower in the latest month. Investors have stepped back to better assess what is going on in the world economy.

The Dow Jones 30 recorded almost an identical month-end closing figure in April as in March, while the S&P 500 was -0.7%, the TSX -0.8% and NASDAQ -1.5%.

Versus their 52-week highs, the DJI was closest to its annual peak (only -0.9%), followed by the S&P 500 (-1.7%) and NASDAQ (-2.8%). Compared to the other three major indices, the Toronto Stock exchange was a disappointing -12.7%.

Equity prices have received support from strong corporate profits. Earnings by the majority of firms reporting their latest quarterly results have exceeded expectations.

Apple Inc.’s revenue in the latest period (the second quarter in the firm’s fiscal year) nearly doubled versus the same time frame in 2011. Net income was $11.6 billion compared with $6.0 billion last year.

A surge in demand for iPhones in China was a big part of the company’s sales success.

Other firms reporting large profit gains have been mainly in consumer goods, such as Target Corp. and The Gap. A sustained increase in the number of jobs in the U.S., along with improving incomes, is helping retail sales.

The vehicles and parts industry is adding to the momentum with a much better level of performance than several years ago. U.S. car, van and truck demand has splashed across the border resulting in stronger auto-related production in Canada. 

Generally speaking, however, the Toronto stock exchange is performing the worst among the four major North American indices. It’s -12% on a year-over-year basis.

There was a notable decline (-17%) in the TSX between April and September of last year. Since then, Toronto share prices have been marking time, with an improvement of only 6%.

The wavering path that Europe is taking, as well as China’s more restrained expansion is having an effect on commodity prices and demand. Almost half of the Toronto exchange is resource oriented.

A couple of years ago, the largest firm on the TSX (by capitalization) was Potash Corp. of Saskatchewan. In Statistics Canada’s latest report on industry-based GDP, a decline in world-wide demand for potash is specifically mentioned as a key reason that output in mining (-7.0%) fell dramatically in February.

The fondest hope of most analysts – and certainly Federal Reserve officials and the administration in Washington – is that the improvement in the U.S. economy is becoming self-sustaining.

A key determinant of whether or not this is realistic can be found in the manufacturing sector.

The latest report on manufacturing activity from the Institute of Supply Management (ISM) was more upbeat than many had been expecting. The Purchasing Managers’ Index (PMI) in April increased to 54.8% from 53.4% the month before.

An index reading above 42.6% indicates the overall economy is expanding, but manufacturing may still be floundering. Not until the index value rises above 50% can manufacturing be categorized as healthy.

The latest number for the PMI shows GDP growth for the 35th straight month and a strong manufacturing sector for the 33rd month in a row.

The historical relationship between the PMI series and “real” (i.e., inflation-adjusted) GDP growth suggests a 4.1% output increase resulting from the latest reading of 54.8%.

Moreover, sub-index measures on new orders (from 54.5% to 58.2%), production (from 58.3% to 61.0%) and employment (from 56.1% to 57.3%) all moved firmly upward. 

The foregoing observations are all encouraging for U.S. manufacturing.

But not so fast; other measures aren’t nearly as optimistic.

The ISM-Chicago branch’s PMI dropped from 62.2% in March to 56.2% in April.  

And orders for durable goods in the U.S. (-4.2%) faltered the most in March since January 2009, according to the Commerce Department.

A plunge in orders for civilian aircraft (-48%) was one major cause of the decline. This is a category of sales that is notorious for its volatility.

Finally, one gauge that analysts often use to assess manufacturing is the “equipment and software” investment figure in GDP.

The Q1 advance was only 1.7% (in “real” seasonally-adjusted and annualized terms), the lowest rate of increase since Q2 2009’s recessionary decline of 4.2%. 

Let’s end this article on a positive note. There is another PMI reading, from another country, that also deserves attention.

In April, China’s PMI (as calculated by the state’s statistical agency) rose to 53.3% from 53.1% in March. It was the highest reading in a year and marked the fifth straight month of expansion for the sector.

Maybe the economic outlook for China isn’t as mushy as we’ve been led to believe.