In today’s Steady Investor, we highlight some key events and market forces that are shaping the financial landscape, including:
- The new sector leading the S&P 500
- An update on China’s economy
- Weak manufacturing signals hint at U.S. economic slowdown
The Best Year-To-Date Performing Sector Isn’t Technology – For all the press that high-flying mega-cap technology stocks get—particularly in light of the rapid AI buildout—the Technology sector is not even the best-performing sector in the S&P 500 this year. It’s Utilities. As of this writing, Utility stocks are up just over 20% for the year, slightly higher than technology stocks and better than the broad S&P 500 index. Utility companies are generally seen as defensive stocks, given the relatively unexciting, but stable, earnings and dividend payments of gas and electric providers across the U.S. However, Utilities also tend to be adversely impacted by higher interest rates, which helps explain the -10% decline logged in 2023. The outlook for lower rates in the future has helped boost Utility shares in 2024. Still, investors have also been optimistic about another key factor that could help Utility companies: surging demand. Some investors see the artificial intelligence revolution as a major new revenue source for Utility companies, as AI requires enormous amounts of computing power, which involves a lot of electricity. If the proliferation of AI infrastructure, tools, and companies takes hold as many anticipate it will, power demand could grow significantly as well. By some estimates, electricity demand from data centers alone could grow by 15% annually over the next decade. This has been good for Utility powers, but investors should keep in mind that increasing power demand does not necessarily mean increasing earnings. If forecasts for power demand and electricity consumption are all correct, Utilities will likely need to make significant investments in expanding the power grid and developing more energy infrastructure, generation, and transmission. This can get costly fast, and a potentially higher-for-longer interest rate environment could cloud the economics of scaling.1
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Headlines Suggest China’s Economy is Deeply Struggling. Data Says Otherwise – Make no mistake, China’s economy has downshifted significantly since the pandemic, and growth continues to be anchored lower by a struggling property sector. But an economy in crisis, as many headlines in financial media suggest, is not an accurate description of China’s current state either, in our view. According to the latest print from the Caixin/S&P Global Services Purchasing Managers’ Index (PMI), most businesses in China’s services sector reported expansion activity. The new business index also remained above 50, which marks the 21st consecutive month of broad growth. The PMI reports tell us that most businesses are seeing solid activity, but we do not necessarily know by how much. This is where the argument that China’s economy remains in a soft patch is a valid one, but we also know that business optimism is the highest it has been since May. The picture painted here is not one of gangbusters expansion necessarily, but it’s also an economy that appears to be on better footing that is widely appreciated.3
U.S. Manufacturing and Services Activity Continue to Diverge – Selling pressure early in the week was tied by some in the media as related to weak manufacturing data. Indeed, the Institute for Supply Management reported manufacturing PMI at 47.2%, which indicates relatively weak manufacturing activity as more factories reported contractionary activity than not. However, the attribution of weak manufacturing data to a one-day equity market selloff is not really how markets work, and it would not likely be a cause of a selloff on its own.4 That’s because manufacturing output commands a relatively small slice of total U.S. economic output, especially when compared to the services sector – which remains in expansion mode. According to the August Services PMI, 51.5% of businesses reported expansion activity for the month, which was slightly higher than July’s print. Business activity registered 53.3%, and the New Orders Index expanded to 53%.5
Finding Silver Linings in a Turbulent Market – It may be hard to find silver linings in this current market, but that doesn’t mean they aren’t there.
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Disclosure
1 Wall Street Journal. September 4, 2024. https://www.wsj.com/livecoverage/stock-market-today-dow-sp500-nasdaq-live-09-04-2024/card/there-s-a-new-sector-leading-the-s-p-500-this-year-ma5iRdwsBpQh65iAtIZT?mod=djemMoneyBeat_us
2 Zacks Investment Management reserves the right to amend the terms or rescind the Volatility can be a good thing guide offer at any time and for any reason at its discretion.
3 MSN. 2024. https://www.msn.com/en-us/money/markets/china-s-services-activity-expansion-slows-in-august-caixin-pmi-shows/ar-AA1pWSTk
4 CNBC. September 3, 2024. https://www.cnbc.com/2024/09/03/weak-manufacturing-measures-raise-specter-of-us-economic-slowdown.html
5 ISM World. 2024. https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/august/
6 Zacks Investment Management reserves the right to amend the terms or rescind the Volatility can be a good thing guide offer at any time and for any reason at its discretion.
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