Why 2021 May See The Resurgence Of U.S. Industrials

Chris Dier-Scalise
·4 min read

With a new administration in the White House, a strong uptick in orders and production numbers and a potential end to the ongoing global pandemic in sight, the industrial sector may be in for a big 2021.

The turnaround would be a long time coming. Even before the global pandemic, industrials lagged behind other major market sectors. The trend became more pronounced through the depths of the COVID-19 pandemic, which saw relatively slow recovery of the sector’s major constituents as a result of supply chain constraints and social distancing measures.

However, following the results of last year’s presidential election, the broad sector saw a sizable bump, with the Industrial Select Sector SPDR Fund (NYSE: XLI) jumping about 12% to a new all-time high, outpacing even the Technology Select Sector SPDR Fund (NYSE: XLK).

There are a variety of catalysts behind the move and not all companies in the sector saw the same momentum. For traders looking to research which companies are poised to outperform in the coming months, trading research platform VantagePoint is hosting an upcoming free demonstration of its software’s predictive analysis and A.I.- enabled charting tools.

In anticipation of the demo and what the technical patterns might suggest for the sector going forward, let’s take a look at the fundamental factors driving interest in the industrial space.

Encouraging Numbers

First, it’s useful to look at the hard numbers the industrial sector has put up in recent months.

According to the U.S. ISM Purchasing Managers Index (PMI), which incorporates production, orders, inventories and deliveries from U.S. manufacturing firms, those numbers are cause for optimism. The index jumped nearly 4 points from September to October and, after a slight contraction in November, surged above 60 points in December, the highest reading the index has seen since 2018.

While the index only shows a monthly snapshot of the rate of production and shouldn’t be taken for a holistic gauge of the industry’s health, the sustained surge in activity over the past three months provides a strong indication that the segment is seeing strong demand in spite of the pandemic.

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More incisive data on the strength of the industrial sector has come directly from its largest constituents in the form of earnings releases. Core industrial names like Honeywell International Inc. (NYSE: HON) and Caterpillar Inc. (NYSE: CAT) are both coming off of positive Q3 top-and bottom-line results. The same goes for other segments of the sector like transportation and logistics firms FedEx Corporation (NYSE: FDX) and Union Pacific Corporation (NYSE: UNP), which both beat analyst expectations in their most recent deliveries.

Although the entire segment posted revenue numbers below pre-COVID levels, these companies, as well as others in the sector, are scheduled to deliver Q4 earnings in the coming days. Given the uptick in production activity over 2020’s final quarter, the sector may soon be back up to full strength.

A New Administration

Of course, given the reaction the industrial sector saw in the first week of November, the clearest catalyst for the renewed interest in the broad sector is the election of Joe Biden to the U.S. presidency.

Even before taking office last week, Biden’s platform outlined his intention to boost domestic spending, including a $2T package heavily aimed at improving and modernizing the nation’s manufacturing and transit networks. He was vocal about a 4-year, $400 billion “Buy American” effort directed squarely at bolstering the federal government’s budget toward U.S. manufacturing.

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President Biden hasn’t wasted time on attempting to make good on that promise. Just this past Monday, Biden signed an executive order to make good on his “Buy American” pledge. The order eliminates loopholes and strengthens oversight around the federal government’s purchases of products and services from U.S. workers and businesses while also directing agencies to audit their budgets and present options for purchasing from domestic firms.

It’s a small step, but one that could portend increased industrial investment from the federal government in the future.

Traders interested in the industrial sector would do well to bear these fundamental trends in mind while also taking advantage of predictive tools to gauge where an individual stock may be headed based on technical patterns.

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