Although the economy remains extremely weak, some investors have pointed to recent data as a reason to at least not be overly pessimistic on the short term future. One item that investors hung their hats on in yesterday’s session was the Chicago PMI report which beat analyst expectations. Although the key report fell, it only declined by 2.3 points, beating expectations which called for a drop to 54.0 from last month’s reading of 58.8. This sent stocks higher in the early part of Wednesday’s trading session but definitely put the pressure on today’s release of the national ISM manufacturing survey to either confirm or deny the recent trend in the space.
Despite the beat on the Chicago PMI, analysts are still looking for the ISM manufacturing survey to slip to 48.5, down from 50.9 last month. If this comes to pass, it will mean that the U.S. manufacturing sector is in a state of contraction, as will any reading below the key 50 level. If this mark is breached, the next key mark will be 43; a reading below that in the next few months will indicate that the whole American economy is in a state of recession and not just the manufacturing sector [also read Five ETFs For A Double Dip Recession].
Yet, with the better-than-expected release for the Chicago region, some are beginning to think a little more optimistically about the national manufacturing report as cheaper raw materials and the near-end of disruptions from Japan have allowed the sector to expand in recent months. Nonetheless, the index has sharply declined in recent reports, going from a reading close to 60 in early Spring down to its current level just above the 50 mark. Given the uncertainty over more easing measures, the future of Europe, and still weak levels of job growth, this report could really go either way, making it an important data point for investors to monitor in order to get a better handle on the short-term outlook for the economy [see all the industrial ETFs here].
Thanks to this key data release, investors should look for industrial ETFs, such as the Dow Jones U.S. Industrial Sector Index Fund (IYJ), to be in focus throughout today’s trading session. IYJ tracks the Dow Jones U.S. Industrials Index which measures the performance of the industrial sector of the U.S. equity market, investing in just under 250 companies in total. Top weightings go to titans such as General Electric, United Technologies Group, and Caterpillar, although firms such as UPS, Union Pacific, and Accenture also make the list of top ten components. Thanks to this broad focus on the segment, IYJ could be a good barometer for how the industrial sector of the nation reacts to the report, making this a key ETF to watch during today’s trading session [see more information on IYJ's fact sheet].
In terms of performance, IYJ has had a rough 2011 as the fund has declined by close to 7% to start the year. However, the iShares product has seen strong gains in the short term, gaining close to 6.6% in the past week alone. If investors see a national ISM Manufacturing survey that is above 50, we could see this short-term trend continue to start the new month. If, however, investors see a decline that is worse than expected, especially in light of the somewhat positive Chicago PMI report, IYJ could continue its longer term trend downward and fall heavily in Thursday trading [see more charts of IYJ].
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Disclosure: No positions at time of writing.