The ISM index offers useful leading information on the relative performance of industrials. Whenever the ISM index sinks below the boom/bust line for five or more consecutive months, it does not pay to underweight industrial stocks as too much bearishness is usually baked in the cake. The opposite is also true. We analyzed relative industrials performance since the early 1990s every time the ISM manufacturing new orders sub-index hit 60. The bottom panel of the above chart shows the median relative performance in the ensuing twelve months. The implication is that industrials stocks will suffer in the coming quarters as too much optimism is already discounted since the post-election reflex advance.
Bottom Line: We reiterate our recent high-conviction underweight stance on the S&P industrials sector.